September 2023 Industrial Production, Capacity Utilization and Capacity

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Total industrial production (IP) increased 0.3% in September (0.0% expected) and advanced at an annual rate of 2.5% in 3Q. Manufacturing output rose 0.4% in September, the index for mining moved up 0.4%, and the index for utilities decreased 0.3%. At 103.6% of its 2017 average, total industrial production in September was 0.1% above its year-earlier level. 

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Market Groups

Most major market groups recorded gains in September. The index for consumer durables rose 1.2% amid widespread increases in its components. On the other hand, the index for consumer nondurable goods was unchanged, as a gain in chemical products was offset by a decline in energy nondurable goods. The production of business equipment fell 0.7%, while the index for defense and space equipment recorded its fifth consecutive monthly gain of at least 1%. Within materials, the index for non-energy durables rose 0.8%, and the index for non-energy nondurables increased 0.5%.

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Industry Groups

Manufacturing output rose 0.4% in September but was 0.8% below its year-earlier level. In 3Q, factory output moved sideways, as a gain of 2.3% (annual rate) in the index for durable manufacturing was offset by a decline of 2.4% (annual rate) in the index for nondurable manufacturing.

In September, the index for motor vehicles and parts moved up only 0.3%, as motor vehicle assemblies were held down by the ongoing strike against three automakers. Elsewhere in manufacturing, gains of 1% or more were recorded by wood products (+2.4%), primary metals, and plastics and rubber products (paper products: +0.5%), and declines of 1% or more were recorded by apparel and leather as well as printing and support. Other manufacturing (publishing and logging) edged down 0.2% but posted a gain of 4.8% for 3Q as a whole.

Mining output moved up 0.4% in September for a fourth consecutive monthly gain. For 3Q, the output of mines advanced at an annual rate of 6.9%. The index for utilities dropped 0.3% in September but saw a 3Q gain of 15.2% (annual rate).

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Capacity utilization (CU) moved up 0.2 percentage point (PP) to 79.7% in September, a rate that is equal to its long-run (1972–2022) average.

Manufacturing CU edged up 0.1PP to 77.8% in September, a rate that is 0.4PP below its long-run (1972–2022) average (wood products: +2.4%; paper: +0.6%). The operating rate for mining increased 0.5PP to 95.1%, a rate that is 8.7PP above its long-run average. The operating rate for utilities decreased 0.4PP to 72.7%, well below its long-run average.

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Capacity at the all-industries level increased by 0.1% MoM (+1.5% YoY) to 130.0% of 2017 output. Manufacturing also edged up by 0.1% (+1.4% YoY) to 128.9%. Wood products: less than +0.1% (+0.8% YoY) to 120.1%; paper products: -0.1% (-1.0% YoY) to 105.7%.

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.

August 2023 International Trade (Softwood Lumber)

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With August exports of goods and services at $256.0 billion (+1.6% MoM; -2.1% YoY) and imports at $314.3 billion (-0.7% MoM; -4.4% YoY), the net trade deficit was $58.3 billion (-9.9% MoM; -13.4% YoY). 

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Softwood lumber exports rose (5 MMBF or +5.0%) in August, while imports edged lower (2 MMBF or -0.2%). Exports were 20 MMBF (-15.5%) below year-earlier levels; imports: 251 MMBF (-17.7%) lower. As a result, the year-over-year (YoY) net export deficit was 231 MMBF (-18.0%) smaller. Also, the average net export deficit for the 12 months ending August 2023 was 5.9% below the average of the same months a year earlier (the “YoY MA(12) % Chng” series shown in the lumber-trade graph above).

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North America (61.2% of total softwood lumber exports; of which Mexico: 39.0%; Canada: 22.2%), Asia (11.8%; especially China: 3.1%), and the Caribbean (20.6%; especially the Dominican Republic: 5.6%) were the primary destinations for U.S. softwood lumber exports. Year-to-date (YTD) exports to China were 66.1% higher than the same month of the prior year. Meanwhile, Canada was the source of most (83.5%) softwood lumber imports into the United States. Imports from Canada were 9.5% lower YTD/YTD. Overall, YTD exports were down 4.7% compared to the prior year; imports: -8.5%.

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U.S. softwood lumber export activity through the Gulf customs region represented 42.2% of the U.S. total; West Coast: 30.1%, and Eastern: 18.2%. Mobile (18.3% of the U.S. total), San Diego (15.6%) Laredo (15.4%), and Seattle (12.0%) were the most active districts. At the same time, the Great Lakes customs region handled 56.0% of softwood lumber imports -- most notably the Duluth, MN district (19.3%) -- coming into the United States. 

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Southern yellow pine comprised 20.5% of all softwood lumber exports; Douglas-fir (11.6%), treated lumber (16.5%), other pine (12.0%) and finger-jointed (12.0%) were also significant.

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.

September 2023 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) rose 0.4% in September (+0.3% expected). Over the last 12 months, the all-items index increased 3.7% before seasonal adjustment.

The index for shelter was the largest contributor to the monthly all-items increase (the 41st consecutive monthly increase to the shelter index), accounting for over half of the increase. An increase in the gasoline index was also a major contributor to the all-items monthly rise. While the major energy component indexes were mixed in September, the energy index rose 1.5% over the month. The food index increased 0.2% in September, as it did in the previous two months. The index for food at home increased 0.1% over the month while the index for food away from home rose 0.4%.

The index for all items less food and energy rose 0.3% in September, the same increase as in August. Indexes which increased in September include rent, owners' equivalent rent, lodging away from home, motor vehicle insurance, recreation, personal care, and new vehicles. The indexes for used cars and trucks and for apparel were among those that decreased over the month.

The all-items index increased 3.7% for the 12 months ending September, the same increase as the 12 months ending in August. The index for all items less food and energy rose 4.1% over the last 12 months. The energy index decreased 0.5% for the 12 months ending September, and the food index increased 3.7% over the last year.

Producer Price Index

The Producer Price Index for final demand (PPI-FD) increased 0.5% in September (+0.3% expected). Final demand prices rose 0.7% in August and 0.6% in July. On an unadjusted basis, the index for final demand advanced 2.2% for the 12 months ended in September, the largest increase since moving up 2.3% for the 12 months ended in April.

Leading the increase in the final demand index in September, prices for final demand goods rose 0.9%. The index for final demand services advanced 0.3%.

Prices for final demand less foods, energy, and trade services increased 0.2% in September, the fourth consecutive advance. For the 12 months ended in September, the index for final demand less foods, energy, and trade services moved up 2.8%.

Final Demand

Final demand goods: The index for final demand goods moved up 0.9% in September, the third consecutive increase. Nearly three-quarters of the broad-based September advance is attributable to a 3.3% rise in prices for final demand energy. The indexes for final demand foods and for final demand goods less foods and energy moved up 0.9% and 0.1%, respectively.

Product detail: Over 40% of the September increase in prices for final demand goods can be traced to a 5.4% rise in the index for gasoline. Prices for jet fuel, processed young chickens, meats, electric power, and diesel fuel also advanced. In contrast, the index for fresh and dry vegetables declined 13.9%. Prices for wood pulp and for utility natural gas also fell.

Final demand services: The index for final demand services advanced 0.3% in September following a 0.2% rise in August. Over 60% of the September increase is attributable to prices for final demand services less trade, transportation, and warehousing, which climbed 0.3%. The index for final demand trade services moved up 0.5%. (Trade indexes measure changes in margins received by wholesalers and retailers.) Conversely, prices for final demand transportation and warehousing services declined 0.4%.

Product detail: A 13.9% jump in the index for deposit services (partial) was a major factor in the September rise in prices for final demand services. The indexes for machinery, equipment, parts, and supplies wholesaling; health, beauty, and optical goods retailing; traveler accommodation services; outpatient care (partial); and application software publishing also moved higher. In contrast, prices for airline passenger services fell 2.1%. The indexes for automobile retailing (partial) and for bundled wired telecommunications access services also decreased.

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The not-seasonally adjusted price indexes we track were mixed on a MoM basis but all lower YoY.

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The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purposes of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

September 2023 Employment Report

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The Bureau of Labor Statistics’ (BLS) establishment survey showed nonfarm employers adding 336,000 jobs in September (over double the 160,000 expected). Also, July and August 2023 employment changes were revised up by a combined 119,000 (July: +79,000; August: +40,000). This breaks the trend, noted in prior posts, of revising employment gains lower for every historical month in 2023.

Meanwhile, the unemployment rate (based upon the BLS’s household survey) was unchanged at 3.8%, as labor-force expansion of 90,000 was essentially matched by +86,000 becoming employed. 

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Observations from the employment reports include:

* Although the two surveys were directionally consistent, jobs gains were far greater than the increase in employed workers.

* Goods-producing industries added 29,000 jobs; service providers: +307,000. Job gains occurred in leisure and hospitality (+96,000); government (+73,000); health care (+40,900); professional, scientific, and technical services (+29,000); and social assistance (+25,000). Total nonfarm employment (156.9 million) is now 4.5 million jobs above its pre-pandemic level in February 2020 (private sector: +4.5 million; public sector: -9,000). Nonetheless, employment is also perhaps 5.1 million below its potential if accounting for growth in the working-age population since January 2006.

Manufacturing gained 17,000 jobs, led by durable goods (+13,000). That result may be consistent with the change in the Institute for Supply Management (ISM) manufacturing employment subindex, which moved back to expansion (to 51.2) in September. Wood products manufacturing gained 1,400 jobs (ISM was unchanged); paper manufacturing: +1,600 (ISM unchanged); construction: +11,000 (ISM increased).

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* The number of employment-age persons not in the labor force rose (+124,000) to 99.5 million; that level is 4.3 million higher than in February 2020. Although working-age civilian population growth (+215,000) outpaced growth in the number of employed (+86,000), the employment-population ratio (EPR) remained at 60.4%, which is 0.7PP below its February 2020 level. 

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* Also, although the working-age civilian population grew by 215,000 while the labor force expanded by 90,000, the labor force participation rate was unchanged at 62.8%. Average hourly earnings of all private employees nudged up by $0.07 (to $33.88), and the year-over-year increase decelerated to +4.2%. Despite the average workweek for all employees on private nonfarm payrolls being unchanged at 34.4 hours, average weekly earnings rose (+$2.41) to $1,165.47 (+3.5% YoY). With the consumer price index running at an annual rate of +3.7% in August, the average worker may be about breaking even in terms of purchasing power. 

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* Full-time workers slipped (-22,000) to 134.2 million; there are now 3.4 million more full-time jobs than in February 2020. For perspective, however, the non-institutional working-age civilian population has risen by nearly 7.8 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 156,000, while those working part time for non-economic reasons jumped (+177,000); multiple-job holders: +123,000. 

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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 September retreated by $7.04 billion, to $235.7 billion (-2.9% MoM; -0.5% 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 September was up 0.3% 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.

September 2023 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil increased by $8.04 (+9.9%) to $89.43/barrel in September. That advance occurred within the context of a somewhat stronger U.S. dollar (broad trade-weighted index basis -- goods and services), the lagged impacts of July’s decrease of 592,000 barrels per day (b/d) in the amount of petroleum products demanded/supplied (to 20.1 million b/d), and accumulated oil stocks that continued trending downward below the midpoint of the five-year average range (September 2023 average: 417 million barrels). 

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Selected highlights from the 29 September 2023 issue of OilPrice.com’s Oil & Energy Insider include:

“The expiry of November ICE Brent futures has seen backwardation between the expiring month and the December contract shoot up to a whopping $2 per barrel,” wrote OilPrice.com’s Michael Kern. “At the same time, despite some very bullish news this week, ranging from wafer-thin Cushing stocks to an improving macro outlook in China, oil prices have been rangebound lately as crude remains overbought and any surge above $95 per barrel triggers resistance. With OPEC+ meeting next week on October 4, focus will now move back to Saudi Arabia and the future of its production cuts.”

Strained Cushing Stocks Stoke Fears of Shortages. As crude inventories at the key US storage hub of Cushing, Oklahoma fell to their lowest since July 2022, at 22.0 million barrels, operators are fearing operational risks as oil becomes difficult to remove if tank storage holds less than 20 million barrels.

Biden’s 5-Year Offshore Plan Sees No Leases Next Year. The Biden administration’s five-year plan for offshore oil and gas leasing does not include any auctions to be held in 2024 and features only three in the subsequent years of 2025-2028, marking the lowest leasing activity since at least 1992.

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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.

September 2023 ISM and S&P Global Surveys

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The Institute for Supply Management‘s (ISM) monthly sentiment survey of U.S. manufacturers reflected slower contraction in the sector during September. The PMI registered 49.0%, up 1.4 percentage points (PP) from August’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. Only the production and employment subindexes popped above 50; the largest changes occurred among prices paid (-4.6PP), employment (+2.7PP), and employment (+2.7PP). 

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Concurrent activity in the services sector -- which accounts for 80% of the economy and 90% of employment -- decelerated (-0.9PP, to 53.6%). Order backlogs (+6.8PP), inventory sentiment (-6.7PP), and new orders (-5.7PP) exhibited the largest changes.

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

Construction. “Conditions remain favorable for mechanical contractors. New construction projects continue to launch. We are still seeing opportunities for cost reductions across many commodities. Inventory levels on finished goods remain strong.”

 

Changes in S&P Global‘s headline index results paralleled those of ISM. Details from S&P Global’s surveys follow --

Manufacturing. Output returns to growth, but prices also rise at increased rate.

Key findings:

• Contraction in new orders slows, with output rising marginally
• Inflationary pressures strengthen but remain historically muted
• Further modest rise in employment as confidence improves

Services. Service sector stagnates in September, as demand conditions wane further.

Key findings:

• Fastest fall in new orders in 2023 so far
• Employment growth quickens
• Selling prices rise at sharper pace

 

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

Manufacturing. “September saw a welcome near-stabilization of business conditions in manufacturing, but a further increase in price pressures is a concern on the inflation front.

“Output reversed some of the loss seen in August as higher employment and improved supply availability helped factories fulfil backlogs of orders.

“Although the pace of production growth remains disappointingly subdued thanks to a further decline in new orders received during the month, notably from weak export markets, there are signs that the situation will improve as we head through to the end of the year.

“Manufacturers’ expectations of future output have jumped to their highest for nearly one and a half years, supply conditions continue to improve, and the rate of order book decline has moderated considerably in recent months, in part due to fewer producers and customers reporting deliberate cost-focused inventory reduction policies.

“Less encouraging was the news on the inflation outlook, as producers’ costs rose at the fastest rate for five months, largely on the back of higher oil prices. These increased costs are already feeding through to higher prices to customers, which will inevitably result in some renewed upward pressure on inflation.”

 

Services. “The final PMI data for September add to indications that the US economy has started to cool again after a resurgence of growth earlier in the summer. Inflationary pressures in the service sector meanwhile remain uncomfortably sticky.

“The biggest change in recent months has been the waning in demand for consumer services, such as travel, tourism and recreation, along with a slump in financial services activity.

“Providers of consumer-oriented services report that a revival of demand in the spring has gradually lost momentum amid the ratcheting up of interest rates and increased cost of living at a time of diminishing savings. In the financial services sector, financial conditions are tightening and uncertainty about the outlook is subduing confidence. Both sectors are now reporting falling activity levels, taking away a major source of support to the wider economy’s expansion.

“The economy therefore looks to be moving into the fourth quarter on a weak footing, hinting at slower GDP growth as we head toward the end of the year.

“Average prices charged for goods and services meanwhile continue to rise at a rate well above the pre-pandemic average, with service sector charge inflation remaining especially stubborn, in part due to recent oil price hikes.”

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.

August 2023 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 August increased $7.7 billion or 1.3% to $586.0 billion. Durable goods shipments increased $1.5 billion or 0.5% to $284.6 billion, led by transportation equipment. Meanwhile, nondurable goods shipments increased $6.3 billion or 2.1% to $301.4 billion, led by petroleum and coal products. Shipments of wood products increased 0.5%; paper: -0.4%.

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Inventories increased $2.8 billion or 0.3% to $855.4 billion. The inventories-to-shipments ratio was 1.46, down from 1.47 in July. Inventories of durable goods increased $1.1 billion or 0.2% to $523.4 billion, led by transportation equipment. Nondurable goods inventories increased $1.7 billion or 0.5% to $332.0 billion, led by petroleum and coal products. Inventories of wood products expanded by 0.2%; paper: -0.4%.

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New orders increased $6.7 billion or 1.2% to $586.1 billion. Excluding transportation, new orders rose by $6.9 billion or 1.4% (-0.7% YoY). Durable goods orders increased $0.4 billion or 0.1% to $284.7 billion, led by fabricated metal products. New orders for non-defense capital goods excluding aircraft -- a proxy for business investment spending -- advanced by $0.7 billion or 0.9% (+0.6% YoY). New orders for nondurable goods increased $6.3 billion or 2.1% to $301.4 billion.

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Unfilled durable-goods orders increased $5.0 billion or 0.4% to $1,335.9 billion, led by transportation equipment. The unfilled orders-to-shipments ratio was 6.78, down from 6.80 in July. 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 through 2020, but have since exhibited a modest upward trend.

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.