January 2020 Currency Exchange Rates

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In January the monthly average value of the U.S. dollar (USD) depreciated versus Canada’s “loonie” (-0.6%) but appreciated against the euro (+0.1%) and yen (+0.2%). On the broad trade-weighted index basis (goods and services), the USD lost 0.5% 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.

4Q2019 Gross Domestic Product: First (“Advance”) Estimate

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The Bureau of Economic Analysis (BEA) pegged its advance (first) estimate of 4Q2019 U.S. gross domestic product (GDP) at a seasonally adjusted and annualized rate (SAAR) of +2.07% (2.1% expected), down 0.04 percentage point (PP) from 3Q2019’s +2.11%.

On a year-over-year (YoY) basis, which should eliminate any residual seasonality distortions present in quarter-over-quarter (QoQ) comparisons, GDP in 4Q2019 was 2.32% higher than in 4Q2018; that growth rate was slightly faster (+0.25PP) than 3Q2019’s +2.07% relative to 3Q2018.

Three groupings of GDP components -- personal consumption expenditures (PCE), net exports (NetX) and government consumption expenditures (GCE) -- contributed to 4Q growth. Private domestic investment (PDI) detracted from it.

Consumer spending rose at a 1.2PP pace in 4Q, a substantial slowdown from gains of 3.2PP (2Q) and 2.1PP (3Q). The headline got a bigger boost -- though likely a short-lived one -- from a sharp decline in the U.S. trade deficit. Exports contributed 0.17PP while the drop in imports bumped up the headline by 1.32PP. The fall-off in imports stemmed mostly from an increase in U.S. tariffs on Chinese goods last September. Companies rushed to beat the tariff increases, then cut back on import orders as the measures went into effect.

The business side of the ledger held the economy back again. Nonresidential fixed investment subtracted 0.2PP from the headline, which was a modest improvement from 3Q’s -0.3PP. The big hit to PDI came from inventory growth, which sank in large part due to last autumn’s strike at General Motors that crimped auto production. Residential activity was a bright spot in an otherwise gloomy PDI -- with a modest (0.04PP) acceleration.

Government spending, meanwhile, contributed 0.47PP to the headline -- largely reflecting an increase in outlays on ships, planes, missile systems and other military hardware.

For this estimate the BEA assumed an effective annualized deflator of 1.50%. During 4Q the inflation recorded by the Bureau of Labor Statistics (BLS) in their CPI-U index was significantly higher at 3.39%. Underestimating inflation results in optimistic growth rates, and if the BEA's nominal data was deflated using CPI-U inflation information the headline growth number would have been a minuscule 0.22%.

The BEA’s growth in real final sales of domestic product, which excludes the effect of inventories, jumped by nearly one-half, to +3.16%, up 1.02PP from 3Q2019. 

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“Some people will take the BEA's "bottom line" number (i.e., the real final sales of domestic product) from the report at its very attractive face value of +3.16% growth,” wrote Consumer Metric Institute’s Rick Davis. “If so, they will be seriously misled. Sadly the key points of this report can be summarized as follows:

-- Correcting for inflation using data from the Bureau of Labor Statistics gives us a headline of only +0.22% growth.

-- The headline was supported by a huge swing in imports -- which in the BEA's calculation matrix actually results from weakened (exchange rate adjusted) domestic demand for foreign goods.

-- Inventories can contract for one of two reasons: either companies can't keep up with demand, or they are allowing inventories to contract because of lower demand. Unfortunately, the consumer and commercial spending lines tell us that the latter seems far more plausible.

“Neither consumers nor fixed investments are driving the headline number,” Davis concluded. “Because of that, the cosmetics of this report are far more glamorous than the reality would suggest.”

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.

December 2019 Residential Sales, Inventory and Prices

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Sales of new single-family houses in December 2019 were at a seasonally adjusted annual rate (SAAR) of 694,000 units (728,000 expected). This is 0.4% (±15.1%)* below the revised November rate of 697,000 (originally 719,000), but 23.0% (±20.0%) above the December 2018 SAAR of 564,000 units; the not-seasonally adjusted (NSA) year-over-year comparison (shown in the table above) was +23.7%. For longer-term perspectives, NSA sales were 50.0% below the “housing bubble” peak and 10.1% below the long-term, pre-2000 average.

An estimated 681,000 new homes were sold in 2019. This is 10.3% (±6.4%) above the 2018 figure of 617,000.

The median sales price of new houses sold in December rose to $331,400 ($10,500 or +3.3% MoM); meanwhile, the average sales price increased to $384,500 ($6,900 or +1.8%). Starter homes (defined here as those priced below $200,000) comprised 10.6% of the total sold, down from the year-earlier 13.2%; prior to the Great Recession starter homes represented as much as 61% of total new-home sales. Homes priced below $150,000 made up 2.1% of those sold in December, down from 5.3% a year earlier.

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

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As mentioned in our post about housing permits, starts and completions in December, single-unit completions increased by 6,000 units (+0.7%). Because sales ticked down (3,000 units; -0.4%) while completions rose, inventory for sale expanded in both absolute (+5,000 units) and months-of-inventory (+0.2 month) terms. 

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Existing home sales advanced in December (190,000 units or +3.6%), to a SAAR of 5.54 million units. Inventory of existing homes for sale shrank in absolute (-240,000 units) and months-of-inventory (-0.7 month) terms. Because new-home sales fell while resales rose, the share of total sales comprised of new homes retreated to 11.1%. The median price of previously owned homes sold in December increased to $274,500 ($3,200 or +1.2% MoM). 

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Housing affordability marginally improved (+0.5 percentage point) despite the median price of existing homes for sale in November inching up by $200 (+0.1%; +5.4 YoY), to $274,000. Concurrently, Standard & Poor’s reported that the U.S. National Index in the S&P Case-Shiller CoreLogic Home Price indices rose at a not-seasonally adjusted monthly change of +0.2% (+3.5% YoY).

"The U.S. housing market was stable in November,” said Craig Lazzara, Managing Director and Global Head of Index Investment Strategy at S&P Dow Jones Indices. “With the month’s 3.5% increase in the national composite index, home prices are currently 59% above the trough reached in February 2012, and 15% above their pre-financial crisis peak. November’s results were broad-based, with gains in every city in our 20-city composite.

“At a regional level, Phoenix retains the top spot for the sixth consecutive month, with a gain of 5.9% for November. Charlotte and Tampa rose by 5.2% and 5.0% respectively, leading the Southeast region. The Southeast has led all regions since January 2019.”

“As was the case last month, after a long period of decelerating price increases, the National, 10-city, and 20-city Composites all rose at a modestly faster rate in November than they had done in October. This increase was broad-based, reflecting data in 15 of 20 cities. It is, of course, still too soon to say whether this marks an end to the deceleration or is merely a pause in the longer-term trend.” 

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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.

December 2019 Industrial Production, Capacity Utilization and Capacity

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Total industrial production (IP) declined 0.3% in December (-0.3% expected), as a decrease of 5.6% for utilities outweighed increases of 0.2% for manufacturing and 1.3% for mining. The drop for utilities resulted from a large decrease in demand for heating, as unseasonably warm weather in December followed unseasonably cold weather in November. For 4Q as a whole, total IP moved down at an annual rate of 0.5%.

At 109.4% of its 2012 average, total IP was 1.0% lower in December than it was a year earlier. 

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Industry Groups

Manufacturing output advanced 0.2% (NAICS manufacturing: +0.2% MoM; -1.3% YoY) in December but decreased at an annual rate of 1.0% in 4Q. The gain in December came despite a decrease of 4.6% for motor vehicles and parts; assemblies of light motor vehicles fell from 11.2 million units (annual rate) in November to 10.3 million units in December.

Excluding the motor vehicle sector, factory output rose 0.5%. The index for durable goods manufacturing slipped 0.2%, as the decrease for motor vehicles outweighed widespread increases in other industries (wood products: +1.1%). The index for nonmetallic mineral products advanced 2.3% for the largest gain among durables. The production of nondurables moved up 0.6%, led by increases of more than 1% for petroleum and coal products and for food, beverage, and tobacco products (paper products: +0.1%). The output of other manufacturing (publishing and logging) decreased 0.2%.

Mining output rose 1.3%, with most of the gain from oil and gas extraction; the index for mining rose at an annual rate of about 2% in 4Q to reverse a similarly sized decrease in 3Q. 

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Capacity utilization (CU) for the industrial sector fell 0.4 percentage point (PP) in December to 77.0%, a rate that is 2.8PP below its long-run (1972–2018) average.

Manufacturing CU edged up 0.1PP in December to 75.2%, about 3.1PP below its long-run average (NAICS manufacturing: 0.0%, at 75.7%; wood products: +0.8%; paper products: +0.1%). The utilization rate for mining increased to 89.6%, remaining above its long-run average of 87.1%. The operating rate for utilities fell to 73.5%, a rate that is about 12PP below its long-run average. 

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Capacity at the all-industries level nudged up 0.2% (+2.1 % YoY) to 142.1% of 2012 output. Manufacturing (NAICS basis) rose fractionally (+0.1% MoM; +1.5% YoY) to 140.2%. Wood products: +0.3% (+4.1% YoY) to 169.2%; paper products: 0.0% (-0.3 % YoY) to 109.7%.

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.

December 2019 Residential Permits, Starts and Completions

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Builders started construction of privately-owned housing units in December at a seasonally adjusted annual rate (SAAR) of 1,608,000 units (1.373 million expected). This is 16.9 percent (±12.8 percent) above the revised November estimate of 1,375,000 (originally 1.365 million units) and 40.8 percent (±20.5 percent) above the December 2018 SAAR of 1,142,000 units; the not-seasonally adjusted YoY change (shown in the table above) was +42.8%.

Single-family housing starts in December were at a SAAR of 1,055,000; this is 11.2 percent (±10.4 percent) above the revised November figure of 949,000 units (+30.4% YoY). Multi-family starts: 553,000 units (+29.8% MoM; +70.5% YoY).

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

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Total completions were at a SAAR of 1,277,000 units. This is 5.1 percent (±15.1 percent)* above the revised November estimate of 1,215,000 (originally 1.188 million units) and 19.6 percent (±14.1 percent) above the December 2018 SAAR of 1,068,000 units; the NSA comparison: +19.8% YoY.

Single-family completions were at a SAAR of 912,000; this is 0.7 percent (±13.5 percent)* above the revised November rate of 906,000 units (+17.5% YoY). Multi-family completions: 365,000 units (+18.1% MoM; +26.7% YoY). 

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Total permits amounted to a SAAR of 1,416,000 units (1.458 million expected). This is 3.9 percent (±1.6 percent) below the revised November rate of 1,474,000 (originally 1.482 million units), but 5.8 percent (±1.1 percent) above the December 2018 SAAR of 1,339,000 units; the NSA comparison: +11.1% YoY.

Single-family permits were at a SAAR of 916,000; this is 0.5 percent (±1.3 percent)* below the revised November figure of 921,000 units (+16.9% YoY). Multi-family: 500,000 (-9.6% MoM; +3.9% YoY). 

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Builder confidence in the market for newly-built single-family homes edged one point lower to 75 in January, according to the latest National Association of Home Builders/Wells Fargo Housing Market Index (HMI). The last two monthly readings mark the highest sentiment levels since July of 1999. Low interest rates and a healthy labor market combined with a need for additional inventory are setting the stage for further home building gains in 2020.

NAHB Chief Economist Robert Dietz believes that, with the Federal Reserve on pause and attractive mortgage rates, the steady rise in single-family construction that began last spring will continue into 2020. However, builders continue to grapple with a shortage of lots and labor while buyers are frustrated by a lack of inventory, particularly among starter homes.

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.

November 2019 International Trade (Softwood Lumber)

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Softwood lumber exports decreased (7 MMBF or -6.3%) in November; imports fell (183 MMBF or -14.8%). Exports were 23 MMBF (-18.1%) below year-earlier levels; imports were 76 MMBF (-6.8%) lower. As a result, the year-over-year (YoY) net export deficit was 53 MMBF (-5.3%) smaller. Also, the average net export deficit for the 12 months ending November 2019 was 3.0% smaller than the average of the same months a year earlier (the “YoY MA(12) % Chng” series shown in the graph above). 

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North America (43.7%; of which Canada: 20.9%; Mexico: 22.9%) and Asia (27.7%; especially China: 6.9%; and Japan: 7.1%) were the primary destinations for U.S. softwood lumber exports; the Caribbean ranked third with a 21.1% share. Year-to-date (YTD) exports to China were -61.2% relative to the same months in 2018. Meanwhile, Canada was the source of most (86.8%) of softwood lumber imports into the United States. Imports from Canada were 5.0% lower YTD than the same months in 2018. Overall, YTD exports were down 22.8% compared to 2018; imports: -4.9%. 

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U.S. softwood lumber export activity through the West Coast customs region represented the largest proportion (33.6% of the U.S. total), followed by the Eastern (29.2%) and Gulf (28.5%) regions. Seattle (18.6% of the U.S. total) maintained the lead over Mobile (17.7%) as the single most-active district. At the same time, Great Lakes customs region handled 60.1% of softwood lumber imports -- most notably the Duluth, MN district (20.9%) -- coming into the United States. 

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Southern yellow pine comprised 24.5% of all softwood lumber exports, Douglas-fir (14.3%) and treated lumber (14.1%) were also significant. Southern pine exports were down 36.8% YTD relative to 2018, while treated: -23.8%; Doug-fir: -6.2%.

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.

December 2019 Consumer and Producer Price Indices (incl. Forest Products)

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Consumer Price Index

The Consumer Price Index for All Urban Consumers (CPI-U) rose 0.2% in December (+0.3% expected) after rising 0.3% in November. The indexes for gasoline, shelter, and medical care all rose in December, accounting for most of the increase in the seasonally adjusted all items index. The gasoline index increased 2.8% in December. Other major energy component indexes were mixed, and the energy index rose 1.4%. The food index rose 0.2% in December with the indexes for both food at home and food away from home increasing over the month.

The index for all items less food and energy rose 0.1% in December after increasing 0.2% in November. Along with the indexes for shelter and medical care, the indexes for apparel, motor vehicle insurance, recreation, and new vehicles all increased in December. The indexes for used cars and trucks, household furnishings and operations, and airline fares were among those to decline.   

The all items index increased 2.3% for the 12 months ending December, the largest 12-month increase since the period ending October 2018. The index for all items less food and energy also rose 2.3% over the last 12 months, the same increase as the periods ending October and November. The food index rose 1.8% over the last 12 months, while the energy index increased 3.4%.

Producer Price Index

The Producer Price Index for final demand (PPI-FD) edged up 0.1% (+0.2% expected) in December. Final demand prices were unchanged in November and rose 0.4% in October. The increase in the final demand index was the result of a 0.3% rise in prices for final demand goods. The index for final demand services was unchanged.

On an unadjusted basis, the final demand index moved up 1.3% in 2019, after a 2.6% advance in 2018. Prices for final demand less foods, energy, and trade services inched up 0.1% in December following no change in November. In 2019, the index for final demand less foods, energy, and trade services climbed 1.5% after advancing 2.8% in 2018.

Final Demand

Final demand goods: The index for final demand goods rose 0.3% in December, the same as in November. Most of the increase in December can be traced to a 1.5% advance in prices for final demand energy. The index for final demand goods less foods and energy edged up 0.1%. In contrast, prices for final demand foods moved down 0.2%.

Product detail: Over 60% of the December increase in the index for final demand goods can be attributed to a 3.7% advance in gasoline prices. The indexes for diesel fuel, fresh fruits and melons, carbon steel scrap, residential electric power, and pork also moved higher. Conversely, prices for beef and veal fell 7.0%. The indexes for jet fuel and for plastic resins and materials also declined.

Final demand services: Prices for final demand services were unchanged in December following a 0.3% decrease in November. In December, a 2.7% advance in the index for final demand transportation and warehousing services offset a 0.3% decline in margins for final demand trade services and a 0.1% decrease in the index for final demand services less trade, transportation, and warehousing. (Trade indexes measure changes in margins received by wholesalers and retailers.)

Product detail: In December, prices for transportation of passengers (partial) jumped 8.5%. The indexes for machinery and vehicle wholesaling; machinery and equipment parts and supplies wholesaling; health, beauty, and optical goods retailing; and portfolio management also increased. In contrast, margins for apparel, jewelry, footwear, and accessories retailing declined 3.7%. The indexes for chemicals and allied products wholesaling, guestroom rental, fuels and lubricants retailing, and professional and commercial equipment wholesaling also moved lower. 

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The not-seasonally adjusted price indexes we track were mixed 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.