What is Macro Pulse?

Macro Pulse highlights recent activity and events expected to affect the U.S. economy over the next 24 months. While the review is of the entire U.S. economy its particular focus is on developments affecting the Forest Products industry. Everyone with a stake in any level of the sector can benefit from
Macro Pulse's timely yet in-depth coverage.

Tuesday, April 27, 2010

Residential Vacancies: Still Plenty of Wide Open Spaces

In 1Q2010, 19.0 million housing units stood vacant, according to the latest U.S. Census Bureau report. Further, 10.6 percent of housing units for rent and 2.6 percent of units for sale were vacant. The rental vacancy rate was 0.5 percentage point (±0.5 percent) higher than the 1Q2009 rate and 0.1 percentage point (±0.4 percent) lower than 4Q2009’s rate. The homeowner vacancy rate of 2.6 percent was 0.1 percentage point (±0.2 percent) lower than the 1&4Q2009 rates (both of which were 2.7 percent). Since the estimates of change were the same size as, or smaller than, their associated standard errors, the Census Bureau cannot tell whether there truly was any change at all.

The homeownership rate (the proportion of total occupied housing units that are owner-occupied) of 67.1 percent was 0.2 percentage point (±0.4 percent) lower than the 1Q2009 rate and 0.1 percentage point (±0.4 percent) lower than the 4Q2009 rate. The relative changes in this rate were not statistically significant, either. If the homeownership rate of 67.1 percent is correct, however, it is the lowest since 1Q2000.

One interesting aspect of these data is that the rental and homeowner vacancy rates are both declining. If foreclosures were forcing households from their homes (as the drop in the homeownership rate seems to indicate is happening), one would expect the homeowner vacancy rate to rise and the rental vacancy rate to fall. The Census Bureau provided no analysis of why both rates fell.

Another interesting observation is that the number of homes “held off market” increased by 1.0 percent (from 14.2 million to 14.4 million) in 1Q2010. The number of vacancies in all other categories either shrank or remained essentially unchanged during that same time. The “held off market” category includes units “held for occasional use, temporarily occupied by persons with usual residence elsewhere, and vacant for other reasons.” The report did not detail which of the three subcategories increased or why.

Particularly because the percentage of total housing inventory that is vacant year-round ticked higher in 1Q2010, the implications of this report are not encouraging for forest landowners and forest products manufacturers. Until a significant dent is made in that percentage, the need for new construction will be muted.

Friday, April 23, 2010

U.S. Housing Market: Looking Up, But For How Long?

Most housing metrics improved in March. In the activity category, only single-family starts and total completions declined; actually, total completions retreated because of a 22 percent drop-off in multi-family units. Absolute numbers of unsold new homes nudged lower, but existing-home inventory grew slightly. Months of inventory declined overall, however. The median price of existing homes rose (by 3.7 percent) despite the influx, while the median new home price fell by 3.4 percent.
At 626,000 units SAAR, total starts are at their highest level since November 2008. They are also 1.6 percent (±15.2 percent) above February’s activity, and 30.7 percent above the nadir seen in April 2009. Even so, activity remains nearly 73 percent below the January 2006 peak, and more than 58 percent below the historical average start rate of 1.51 million. Although recovering, starts remain below the bottoms seen during all previous housing downturns since 1959.
New-home sales, which had been dwindling since mid-year 2009, caught a major updraft when “surging” 26.9 percent (to 411,000 SAAR) in March. Because the standard error around the total sales estimate is 21.1 percent, the Census Bureau is 90 percent certain sales actually increased in March. While that 26.9 percent increase in sales appears quite impressive, it is so only because the absolute change came off such a small base (324,000 in February – a far cry from the peak of 1.4 million in July 2005).

Home resales also rose (6.8 percent) in March, to 5.35 million SAAR. Sales were 16.1 percent above year-earlier levels, but 26.2 percent below the September 2005 peak. Most analysts attributed the bump in new and existing home sales to the first of two impending federal tax credit deadlines. In order to qualify for the credit, a buyer must sign a sales contract before April 30, and close before June 30. New-home sales are recorded when a contract is signed, not when closing occurs; hence, April's sales figures are likely to be the last to show any impact from the subsidy. "We expect a further sharp rise in April sales then a sharp, though temporary, drop in May," wrote Ian Shepherdson, chief domestic economist for High Frequency Economics. "After that, much depends on whether Congress extends the tax break; we expect it will."
Builders appear to agree with Shepardson’s outlook, as permits continued to climb – in both absolute and year-over-year percentage terms – in March. Progress will almost certainly be painfully slow, however, because foreclosures will continue to clog the market. Nearly 2.8 million foreclosures were initiated in 2009 and that figure is likely to climb in 2010, according to Neil Barofsky, the Special Inspector General for the Troubled Asset Relief Program. There were more than 932,000 foreclosure filings in 1Q2010 alone, an annualized pace of more than 3.7 million foreclosures.
Forest products manufacturers could get some additional help from renovation and remodeling activity. The Leading Indicator of Remodeling Activity, compiled by the Remodeling Futures Program at the Joint Center for Housing Studies (JCHS) of Harvard University, suggests annual spending may accelerate by nearly five percent in 2010. “The gradual recovery in the broader economy should encourage more remodeling spending by homeowners,” said Nicolas Retsinas, JCHS director. “This year could produce the first annual spending increase for the industry since 2006.”

March 2010 Consumer and Producer Price Indices: Bottle Rockets and Duds

On a seasonally adjusted basis, the consumer price index for all urban consumers (CPI-U) increased 0.1 percent in March. The CPI-U has jumped 2.3 percent over the past 12 months. The producer price index for finished goods (PPI) was somewhat “livelier” in March, rising 0.7 percent; that brought the year-over-year change to 6.0 percent – the largest annual gain since an 8.8 percent rise in September 2008. The Bureau of Labor Statistics attributed over 70 percent of the increase in the finished goods index to a 2.4 percent jump in prices for consumer foods.

Producer price indices of some relevance to forest products manufacturers have moved higher in recent months; various hypotheses (e.g., capacity curtailments coupled with higher capacity utilization, rainy/snowy winter weather that restricted harvest activity, and greater export demand) have been advanced for the price rises.

The scaling in the six-chart figure above gives the impression that year-over-year percentage changes in the PPIs of all processing stages or commodity groups are “rocketing to the moon.” That isn’t necessarily the case, as shown by the figure at left and table below. While prices of softwood logs, bolts and timber are presently on a year-over-year “moon shot” at 32.3 percent (although we expect softwood logs to follow pulpwood’s lead and lose momentum as weather and ground conditions dry out), prices faced by the pulp, paper and allied products sector are a comparatively tame 2.7 percent. It’s quite interesting to see how PPI trajectories are diverging after having been quite tightly grouped six months ago.

Tuesday, April 20, 2010

Macro Pulse April 2010 -- Defying Gravity

Executive Summary

The downward revision in 4Q2009 GDP growth (to 5.6 percent) may be a harbinger of more modest growth in 1Q2010. The economy added jobs in March, but most of those jobs were only temporary hires that will provide only a minor boost to spending. Some elements of private domestic investment – most noticeably manufacturing and service industry output – are contributing to GDP gains, but others (e.g., housing) continue to exert a drag on growth. U.S. exports are slowing, in part because of dollar strength against the euro. Crude oil appears to be on another price upswing.

Click here to read the entire April 2010 Macro Pulse.

U.S. Trade Deficit Widened in February: Is Renewed Dollar Strength Stunting Export Volumes?

According to the U.S. Commerce Department, total February exports of $143.2 billion and imports of $182.9 billion resulted in a goods-and-services trade deficit of $39.7 billion, up from $37.0 billion in January (revised). February exports rose by $0.3 billion over January’s $142.9 billion, while imports were $3.0 billion higher than January’s $179.8 billion.

There is a correlation of over 0.60 between the trade deficit and “broad” dollar index (a relative measure of value against a basket of 26 other currencies). I.e., the dollar’s value has some influence on the size of the trade deficit. In general, the deficit widens when the dollar depreciates, and shrinks when the dollar appreciates (lower graph). The trade deficit has been rising since May 2009, partly because the dollar weakened after March 2009, but could begin shrinking again as a result of the dollar’s appreciation since November 2009.

This points to a dilemma for U.S. manufacturers: A weaker dollar makes their products relatively more attractive in both the domestic and export markets, but it also tends to worsen the trade deficit. Conversely, a stronger dollar stunts demand for their products, but improves the overall trade deficit. In a sense, then, what’s good for exporters isn’t necessarily good for the economy as a whole.

Dollar strength appears to be decreasing U.S. forest products export volumes and stimulating a greater volume of imports. That statement may seem to contradict the contention that a stronger dollar narrows the trade deficit, but that apparent disconnect is at least partly resolved by realizing the trade deficit reflects the interaction of volume and per-unit value while the lumber and paper trade data measure just tons or board feet. Exports of pulp, paper and paperboard decreased 6.2 percent in February relative to January (although they were 13.6 percent higher than a year earlier). Imports rose 2.7 percent between January and February, but were 2.2 percent lower than in February 2009. The picture is a bit murkier for lumber: Exports rose 6.9 percent in February at the same time imports also rose 13.0 percent. Lumber exports were up 36.8 percent on a year-over-year basis in February, while imports were 3.6 percent higher.

Manufacturing Mixed in March

The Federal Reserve’s G.17 report showed that industrial production edged up 0.1 percent in March and increased at an annual rate of 7.8 percent in 1Q2010. Manufacturing output rose 0.9 percent in March, led by widespread gains among durable goods industries. Although perhaps held down by February’s winter storms, 1Q2010 factory production as a whole rose at an annual rate of 6.6 percent. At 101.6 percent of its 2002 average, industrial output in March was 4.0 percent above its year-earlier level. Output from individual forest products industries was mixed in March: Wood Products advanced, while Paper retreated.

Capacity utilization for total industry advanced 0.2 percentage point to 73.2 percent, 5.3 percent above the rate from a year earlier. As with industrial production, capacity utilization among forest products manufacturers was mixed – Wood Products ran harder in March, while slack increased among Paper manufacturers. Capacity utilization increased in all-industry and Wood Products because of increased output and the shuttering of additional capacity.
Capacity utilization is a key statistic the Federal Reserve uses to indicate the degree of economic slack and the risk of price instability. The majority of the all-industries capacity utilization improvement since mid-year 2009 has been the result of higher production rather than reduced capacity. Capacity utilization remains well below “normal” levels at present; based on that metric alone, it seems unlikely the Federal Reserve will raise interest rates anytime soon. However, we believe market conditions will force interest rates higher. Should this scenario unfold, capacity utilization may ultimately come back into balance primarily through capacity losses instead of increased production. Aggressively leveraging competitive advantage will be a key to success in such a future.

Monday, April 19, 2010

Retail Sales Increased in March: The Question is “Why?”

Total retail sales increased by 1.6 percent (to $363.2 billion) in March, a sign – according to many economists – that the recovery is broadening. “What we’re seeing now is the consumer take part in the recovery,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. “The Fed’s not taking the punch bowl away quite yet,” because inflation is “very tame,” he said.

However, rising unemployment and home foreclosures beg the question: “Where is the money coming from to support higher retail sales?” There are a couple of interesting possibilities beyond the most obvious (i.e., that those still employed are feeling a little freer with their pocketbooks):

* Anecdotal evidence indicates some homeowners are foregoing mortgage payments and purchasing “stuff” with the money they should be paying for housing. We doubt this practice is sufficiently widespread to materially boost consumer spending, but it is useful to be aware of this development.

* The Census Bureau’s method for calculating year-over-year changes uses only same-store sales for comparison; there is no attempt to account for the loss of sales at firms that have gone bankrupt (or underperforming chain stores that have closed) in the intervening time period. Same-store sales rise if, for example, the same total volume of merchandise is being sold through fewer outlets. Since the Census Bureau samples only a portion of existing retail establishments and infers activity of the entire industry from that sample, one can see how the result might look fairly positive.

Alternative views of retail activity, like sales tax revenue and real-time data on internet purchases of major durable goods provide a different – and more pessimistic – picture. Time will tell which view is right.

Wednesday, April 14, 2010

Rail Traffic Chugs Ahead in March

Data from the Association of American Railroads indicate that the volume of U.S. rail traffic in March 2010 increased by double-digit percentages from February, and – in most cases – was greater than the same month in 2009. Only pulp and paper products traffic was lower than a year earlier.

These data provide another confirmation that the economy grew during 1Q2010.

Monday, April 5, 2010

Manufacturing and Service Sectors Gain in March

The survey of U.S. manufacturing firms by the Institute for Supply Management (ISM) showed the pace of expansion quickened in March (to 59.6 percent, from 56.5 percent in February). Readings over 50 percent indicate more firms said business was improving than said it was worsening.

"The manufacturing sector grew for the eighth consecutive month during March,” reported Norbert Ore, chair of ISM’s Manufacturing Business Survey Committee. “The rate of growth as indicated by the Purchasing Managers’ Index is the fastest since July 2004. Both new orders and production rose above 60 percent this month, closing the first quarter with significant momentum going forward... [S]igns for employment in the sector continue to improve...indicating that manufacturers are continuing to fill vacancies. The Inventories Index provided a surprise as it indicated growth for the first time following 46 months of liquidation – perhaps signaling manufacturers' willingness to increase inventories based on expected levels of activity." One item that Ore failed to highlight was that manufacturing input prices rose 8 percent in March.

Wood Products managed to eek out a gain in March, thanks mainly to a bump up in production. New orders (including export orders) and a backlog of orders put Paper Products in the "plus" column.

Service sector activity added to February's gains; the non-manufacturing index registered 55.4 (up 2.4 percentage points), reflecting growth for a fourth consecutive month. Two of the three service industries we track shared in that gain: Construction and Agriculture, Forestry, Fishing & Hunting. Real Estate lost ground in all categories except order backlogs.

Corrugated containers, packaging and paper were among the commodities up in price; construction labor was one commodity down in price.

Friday, April 2, 2010

Construction “Snowed In” in February

The U.S. Census Bureau reports the value of construction put in place fell “across the board” in February, relative to January. The closest thing to a bright spot was the private non-residential category, which declined by a comparatively modest 0.4 percent. Inclement weather and poor economic conditions have been widely cited as culprits behind the drop.

February’s activity reversed the trend that had been in place during the previous four months; i.e., the decline in overall construction spending picked up speed, after having slowed between October 2009 and January 2010.

March 2010 Employment Report: Turn-up or Turnip?

According to the Bureau of Labor Statistics, the U.S. economy added 162,000 jobs in March. While some described the payroll jump as the "best gain in three years," a bit of digging reveals little to get excited about. For example, of those 162,000 jobs:
  • 81,000 were generated from the BLS's birth/death model;
  • 40,000 were hired by "temp" agencies; and
  • 48,000 were temporary Census Bureau hires.
In other words, 169,000 of the 162,000 new jobs (yes, you read that correctly) were either potentially fictitious or temporary positions -- hardly the stuff of which sustainable recoveries are made.

Elsewhere in the report, the BLS revealed that the number of part-time workers increased, as did those who gave up looking for work. Also, the average workweek increased by only six minutes (to 34.0 hours, still near record lows) while average hourly earnings fell by two cents. These metrics demonstrate only tepid labor demand.

Finally, although 27 months have passed since the recession began, employment is still essentially six percent lower than the number of jobs that existed in December 2007 (click on graph above for a larger image).

In conclusion, taking the BLS employment report at face value could leave a bad taste in one's mouth -- much like eating turnips (apologies to those who actually like turnips).

We will have more to say about future prospects for employment in the upcoming April issue of Economic Outlook, available from Forest2Market.