September 2015 Construction Spending

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Overall construction spending during September 2015 was estimated at a seasonally adjusted annual rate (SAAR) of $1,094.2 billion, 0.6% (±1.8%)* above the revised August estimate of $1,087.5 billion (originally $1,086.2 billion). The seasonally adjusted September figure is 14.1% (±2.1%) above the year-earlier estimate of $959.2 billion; the not-seasonally adjusted figure was +14.3% YoY.

During the first nine months of this year, construction spending amounted to $786.6 billion, 10.5% (±1.3%) above the $711.8 billion for the same period in 2014.

PRIVATE CONSTRUCTION

Spending on private construction was at a SAAR of $794.2 billion, 0.6% (±0.8%)* above the revised August estimate of $789.7 billion. Residential construction was at a SAAR of $394.7 billion in September, 1.9% (±1.3%) above the revised August estimate of $387.5 billion. Nonresidential construction was at a SAAR of $399.5 billion in September, 0.7% (±0.8%)* below the revised August estimate of $402.2 billion.

PUBLIC CONSTRUCTION

In September, the estimated SAAR of public construction spending was $300.0 billion, 0.7% (±3.0%)* above the revised August estimate of $297.8 billion. Educational construction was at a SAAR of $69.1 billion, 2.4% (±4.1%)* above the revised August estimate of $67.5 billion. Highway construction was at a SAAR of $91.2 billion, 0.3% (±7.2%)* above the revised August estimate of $90.9 billion.

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

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

3Q2015 Gross Domestic Product: First (Advance) Estimate

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In its first (“advance”) estimate of 3Q2015 U.S. gross domestic product (GDP), the Bureau of Economic Analysis (BEA) reported that the economy was growing at a 1.49% seasonally adjusted and annualized rate, down 2.43 percentage points from 2Q. The consensus among economists was for a growth rate of +1.7%. A better metric involves comparing growth to the same quarter one year ago. For 3Q2015, the year-over-year growth was 2.0% -- down from 2Q's 2.7% YoY growth.

As for groupings of GDP components, personal consumption expenditures (PCE) and government consumption expenditures (GCE) contributed to 3Q growth whereas private domestic investment (PDI) and net exports (NetX) detracted from it. 

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As the graph above indicates, the most obvious quarter-over-quarter change occurred in inventories. The rate of private inventory accumulation shrank by nearly half relative to 2Q (rising by the smallest amount since 1Q2014), in the process subtracting 1.44% from the 3Q headline. As we have frequently mentioned, inventories can introduce noise and seriously distort the GDP headline number over the short run; because of this, the BEA also publishes real final sales of domestic product -- a secondary headline that excludes the impact of inventories. For 3Q, real final sales grew at a much more robust +2.93%.

Consumer activity once again contributed the bulk of the headline number (+2.19 percentage points), although that contribution was muted when compared to 2Q (0.24 percentage point lower); moreover, growth in health care spending was again the single largest line item, comprising one-fifth of the PCE total. Meanwhile, fixed commercial investments, governmental spending and exports weakened materially, while imports subtracted less from the headline than during the prior quarter.

In summary, then, the 3Q GDP report was “a mixed bag indeed.”

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 2015 Residential Sales, Inventory and Prices

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Sales of new single-family homes turned lower in September, falling by 61,000 units (-11.5%), to a seasonally adjusted and annualized rate (SAAR) of 468,000 units -- well below the 549,000 expected. The drop was in addition to downward revisions to July and August data (combined -27,000 units), and resulted in the largest month-to-month retreat since July 2013 and the first year-over-year decline in not seasonally adjusted sales since November 2014. Year-to-date (YTD), sales were 16.7% above the same months in 2014. For perspective, September sales were roughly 66% below the “bubble” peak and about 31% below the long-term, pre-2000 average.

Meanwhile, the median price of new homes sold jumped by $7,800 (+2.7%) to $296,900. The average price of homes sold, by contrast, leapt by a more robust $21,100 (+6.2%) -- to $364,100 -- implying that a significant proportion of total sales were high-end homes. Because sales decreased while single-family starts increased, the three-month average ratio of starts to sales rose to 1.50 -- above the average (1.41) since January 1995. 

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As mentioned in our post about housing permits, starts and completions in September, single-unit completions fell by 12,000 units (-1.8%). Because completions retreated more slowly than sales, new-home inventory expanded in absolute terms (+10,000 units) and months of inventory (+0.9 month). 

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Existing home sales gained in September (+250,000 units or 4.7%) to 5.55 million units (SAAR); that result was above expectations of 5.35 million. Because sales of new homes fell while existing homes increased, the share of total sales comprised of new homes dropped to 7.8%. The median price of previously owned homes sold in September declined another $6,600 (-2.9%) to $221,900. Inventory of existing homes contracted in both absolute (-60,000 units) and months-of-inventory terms (-0.3 month). 

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Housing affordability marginally improved in August, as the median price of existing homes for sale retreated by $3,200 (-1.4%) to $230,200. Concurrently, Standard & Poor’s reported that the U.S. National Index in the S&P/Case-Shiller Home Price indices posted a not-seasonally adjusted monthly change of +0.3% (+4.7% compared to a year earlier).

“Home prices continue to climb at a 4% to 5% annual rate across the country,” said David Blitzer, Managing Director and Chairman of the Index Committee for S&P Dow Jones Indices. “Most other recent housing indicators also show strength. Housing starts topped an annual rate of 1.2 million units in the latest report with continuing strength in both single family homes and apartments. The National Association of Home Builders sentiment survey, reflecting current strength, reached the highest level since 2005, before the housing collapse. Sales of existing homes are running about 5.5 million units annually with inventories of about five months of sales. However, September new home sales took an unexpected and sharp drop as low inventories were cited as a possible cause.

“A notable part of today’s economy is the continuing low inflation rate; in the year to September, consumer prices were unchanged. Even excluding food and energy, the core inflation was 1.9%. One result is that a 5% price increase in the value of a house means more today than it did in 2005-2006, the peak of the housing boom when the inflation rate was higher. The rebound from the recent lows was faster than the 1997-2005 housing boom, and also much less driven by inflation.” 

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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 2015 Residential Permits, Starts and Completions

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Total housing starts rose in September to a seasonally adjusted and annualized rate (SAAR) of 1.206 million units (1.14 million expected) -- comparable to activity previously seen (other than this past June) in October 2007. September’s level was 74,000 units above (+6.5% ± 16.4%*) August’s 1.132 million units (revised from 1.126 million). The increase in total starts was split as follows -- single-family: +3,000 units (+0.3% ± 9.6%*); multi-family: +72,000 units (+18.3%). September marks the fifth consecutive month in which there were more than 500,000 multi-family units under construction in structures with five or more units, the longest streak since the mid-1970s.

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

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Total starts were 17.8% above their not-seasonally adjusted year-earlier level (single-family: +11.1%; multi-family: +28.7%). Year-to-date (YTD) comparisons to 2014 were all in the 11 to 14% range. 

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Completions rose by 72,000 units (+7.5% ± 13.6%*) in September, to 1.028 million units SAAR. The increase was limited to the multi-family component (+84,000 units or 27.9%); single-family completions fell by 12,000 units (-1.8% ± 9.9%*). 

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Total permits retreated again in September, falling by 58,000 units (-5.0% ± 1.4%) to 1.103 million SAAR. The decrease fell more heavily on the multi-family component: -56,000 units (-12.1%); single-family: -2,000 units (-0.3% ± 1.9%*). YTD total permits were 11.2% above the same months in 2014, driven by the multi-family component (+18.3%).

The latest National Association of Home Builders/Wells Fargo Housing Market Index (HMI) gained 3 points (to 63) in October -- a level comparable to the end of the housing boom in late 2004. (An HMI value above 50 means more builders feel the market is good than feel it is poor.) “The fact that builder confidence has held in the 60s since June is proof that the single-family housing market is making lasting gains as more serious buyers come forward,” said NAHB Chairman Tom Woods. “However, our members continue to tell us there are still pockets of softness in some markets across the nation, and that they face challenges regarding the availability of lots and labor.”

“With October’s three-point uptick, builder confidence has been holding steady or increasing for five straight months. This upward momentum shows that our industry is strengthening at a gradual but consistent pace,” said NAHB Chief Economist David Crowe. “With firm job creation, economic growth and the release of pent-up demand, we expect housing to keep moving forward as we start to close out 2015.” 

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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 2015 Industrial Production, Capacity Utilization and Capacity

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Total industrial production (IP) decreased 0.2% in September (-0.3% expected) after edging down 0.1% in August (originally -0.4%). Manufacturing output moved down 0.1% (but +1.6% YoY) for a second consecutive monthly decrease; the index for mining fell 2.0% (with oil and gas drilling down 4%, to its lowest level this century), while the index for utilities rose 1.3%. For 3Q as a whole, total IP rose at an annual rate of 1.8%, and manufacturing output increased 2.5%. A strong gain for motor vehicles and parts contributed substantially to the quarterly increases.

At 107.1% of its 2012 average, total industrial production in September was 0.4% above its year-earlier level. Wood Products output fell 2.0% (-2.0% YoY) while Paper decreased 0.5% (-2.5% YoY). 

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Capacity utilization (CU) for the industrial sector fell 0.3% in September to 77.5%, a rate that is 2.6 percentage points below its long-run (1972–2014) average. Wood Products CU tumbled 2.1% (-4.3% YoY) to 68.2%; Paper retreated by 0.5% (-1.9% YoY) to 81.5%. 

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Capacity at the all-industries and manufacturing levels moved higher -- All-industries: +0.1% (+1.6% YoY) to 138.1% of 2012 output; Manufacturing: +0.1% (+1.3% YoY) to 138.7%. Wood Products extended the upward trend that has been ongoing since November 2013 when increasing by 0.2% (+2.5% YoY) to 159.8%. Paper was unchanged (-0.6% YoY) at 116.9%.

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 2015 Consumer and Producer Price Indices (incl. Forest Products)

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The seasonally adjusted consumer price index for all urban consumers (CPI-U) decreased 0.2% in September – in line with expectations. The energy index fell 4.7% in September, with all major component indexes declining. The gasoline index continued to fall sharply and was again the main cause of the seasonally adjusted all items decrease. The indexes for fuel oil, electricity, and natural gas declined as well.

In contrast to the energy declines, the indexes for food and for all items less food and energy both accelerated in September. The food index rose 0.4%, its largest increase since May 2014. The index for all items less food and energy rose 0.2% in September. The indexes for shelter (rent: +0.4% MoM; owners’ equivalent rent: +0.3% MoM), medical care, household furnishings and operations, and personal care all increased; the indexes for apparel, used cars and trucks, new vehicles, and airline fares were among those that declined.

The all items index was essentially unchanged for the 12 months ending September after posting a 0.2% increase for the 12 months ending August. The 18.4% decline in the energy index over the past year offset increases in the indexes for food (up 1.6%) and all items less food and energy (up 1.9%). Rent increased 3.7% YoY; owners’ equivalent rent: +3.1% YoY.

The seasonally adjusted producer price index for final demand (PPI) declined 0.5% in September (-0.2% expected). Final demand prices fell 1.1% for the 12 months ended in September, the eighth straight 12-month decline.

In September, two-thirds of the decrease in the final demand index is attributable to prices for final demand goods, which fell 1.2%. The index for final demand services moved down 0.4%.

Final demand goods: The index for final demand goods moved down 1.2% in September, the largest decrease since a 1.9% drop in January. In September, over 80% of the decline can be traced to prices for final demand energy, which fell 5.9%. The index for final demand foods decreased 0.8%. Prices for final demand goods less foods and energy were unchanged.

Product detail: Over two-thirds of the September decline in the final demand goods index is attributable to prices for gasoline, which fell 16.6%. The indexes for beef and veal, diesel fuel, industrial chemicals, chicken eggs, and residual fuel also moved lower. In contrast, motor vehicle prices rose 0.5%. The indexes for fresh and dry vegetables and for pharmaceutical preparations also advanced.

Final demand services: The index for final demand services decreased 0.4% in September, the largest decline since falling 0.5% in February. In September, almost half of the drop can be traced to prices for final demand services less trade, transportation, and warehousing, which decreased 0.3%. The indexes for final demand trade services and for final demand transportation and warehousing services also moved lower, falling 0.4% and 0.7%, respectively. (Trade indexes measure changes in margins received by wholesalers and retailers.)

Product detail: Over a quarter of the September decline in the index for final demand services is attributable to prices for securities brokerage, dealing, investment advice, and related services, which dropped 4.3%. The indexes for machinery and equipment wholesaling; loan services (partial); apparel, footwear, and accessories retailing; portfolio management; and airline passenger services also moved lower. Conversely, margins for automotive fuels and lubricants retailing climbed 12.4%. The indexes for deposit services (partial) and water transportation of freight also increased. 

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Almost all of the price indexes we track declined month-over-month in September, and all fell on a year-over-year basis. 

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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.

October 2015 Macro Pulse -- The Day After?

Those of a certain age may recall the 1983 TV movie The Day After that explored possible effects of nuclear war on the United States. Although hardly on the same level, some of the hyperbole surrounding the proverbial “wall of cheap Canadian wood” -- allegedly poised to flow south after the Softwood Lumber Agreement (SLA) between the United States and Canada expired on October 12 -- suggested a catastrophe-in-the-making for U.S. lumber producers. Interestingly, however, whereas many market watchers expected lumber prices to collapse, that has not happened (so far at least). In fact, lumber futures prices have actually rebounded smartly from late-September lows; as of mid-October, futures prices of several near-term contract dates had recouped roughly half of the ground lost since June. One source attributed the price jump to traders covering short positions after observing U.S. imports of Canadian timber in October “were on pace to be the smallest monthly volumes in at least two years.” The market can turn on a dime, of course, but we conclude from these observations that most “fallout” from the SLA’s expiration may have already occurred.

Click here to read the rest of the October 2015 Macro Pulse recap.

The Macro Pulse blog is a commentary about recent economic developments affecting the forest products industry. The monthly Macro Pulse newsletter summarizes the previous 30 days of commentary available on this website.