September 2010 International Trade

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According to data compiled by the Netherlands Bureau for Economic Policy Analysis, the volume of world trade declined by 0.6 percent in September, on the heels of a downwardly revised 1.4 percent (originally 1.5 percent) increase in August. World trade increased by 0.9 percent in 3Q2010 when compared to the previous quarter, the lowest quarterly gain since 2Q2009.

Import volumes declined both in advanced and emerging economies, the major exception being Latin America, where imports continued to grow strongly. Imports fell most heavily in the Euro Area. The only regions that achieved positive export growth were Latin America and Central and Eastern Europe, the latter doing remarkably well after having experienced several months of declines.

Although the growth in global demand appears to be slowing, prices have not yet fallen by an appreciable degree; in fact prices moved higher (by nearly 0.7 percent) for a third consecutive month in September.
 

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Turning to the United States, total September exports of $154.1 billion and imports of $198.1 billion resulted in a goods and services deficit of $44.0 billion, down from $46.5 billion in August (revised up from $46.3 billion). September exports were $0.5 billion more than August exports of $153.6 billion while imports were $2.0 billion less than August imports of $200.1 billion.
 

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The trade slowdown appears to be affecting the U.S. paper exports. Exports of wood pulp, paper and paperboard retreated by 139,000 metric tons (4.6 percent) in September. At the same time, imports rose by 43,000 tons (11.4 percent). Despite the retreat, exports remained well above year-earlier levels.
 

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Softwood lumber exports ticked up by 7 million board feet, while imports declined by virtually the same amount. Exports are 54.3 percent higher than year-earlier levels, but imports are down by only 1.9 percent.
 

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With the U.S. dollar weakening in October by nearly 3 percent against a basket of 26 currencies, we would not be surprised to see the October trade deficit widen. Although there is considerable monthly “noise” in the relationship between the dollar’s value and the magnitude of the trade deficit, in broad terms the deficit widens when the dollar depreciates. Conversely, the deficit narrows when the dollar appreciates.

3Q2010 Gross Domestic Product: Second Estimate

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The Bureau of Economic Analysis (BEA) reported that the rate of growth in real U.S. gross domestic product (GDP) accelerated more in 3Q2010 than originally estimated. The U.S. economy expanded at a 2.5 percent annual rate (the original estimate was 2.0 percent), up from 1.7 percent in the previous quarter.
 

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The BEA’s revisions showed bigger gains in exports, consumer spending and business investment in new equipment than previously estimated. However, David Rosenberg, chief economist at Gluskin Sheff, provided some counterbalance to the seemingly “positive” 3Q GDP revisions:

“While the upward revision to 3Q GDP was impressive and broad-based, the monthly data on GDP reveal a sharp deceleration. For example, over the three months to September (point-to-point as opposed to quarterly averages), real GDP actually slowed to a 1.0 percent annual rate -- down from 1.7 percent in July, 2.6 percent in June and 4.6 percent at the turn of the year. Based on information at hand, it looks as though 4Q real GDP is coming in closer to a 1.7 percent annual rate, so the moderation in overall economic activity will be more evident this quarter than it was in Q3 (sometimes quarterly averages masks what the true momentum really is).

“Heading into the second year of a recovery, [we should expect to see] a 5 percent-growth economy that is accelerating; not a 1 to 2 percent-growth economy that is rife with downside risks. To be sure, corporate profits have been terrific, but not due to any meaningful increase in top-line pricing power. Fully 96 percent of the rebound in output since the recession ended has been due to productivity growth -- talk about a miracle, especially since there has been no capital deepening now for about a decade. Productivity leads to income growth, but when the U6 unemployment rate is 17 percent (which means dramatic excess capacity in the jobs market), that income accrues to capital, not to labor.

“Compensation per hour is declining and unit labor costs have fallen nearly 2 percent in the past year, which has been a major underpinning for profit margins, to be sure. How long the productivity miracle can last is anyone's guess, but the excess slack in the labor market will linger on. What kept the consumer alive through all this was the massive help from Uncle Sam, but that is now coming to an end, which in turn will have some negative impact on domestic demand and revenue growth for the business sector. So, the combination of strong ex-U.S. growth and sustained solid productivity gains are going to be needed more than ever in order for the string of profits-surpassing-expectations to be extended into 2011.”

October 2010 Consumer and Producer Price Indices

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The seasonally adjusted Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2 percent in October. Over the last 12 months, the all items index increased 1.2 percent. As has frequently been the case in recent months, an increase in the energy index was the major factor in the all items seasonally adjusted increase. The gasoline index rose for the fourth month in a row and accounted for almost 90 percent of the all items increase; the household energy index rose as well.

The food index rose slightly, while the index for all items less food and energy was unchanged -- the third month in a row with no change. The indexes for shelter and medical care rose, but these increases were offset by declines in an array of indexes including new vehicles, used cars and trucks, apparel, recreation, and tobacco.

The seasonally adjusted Producer Price Index for Finished Goods (PPI) increased 0.4 percent in October. This advance followed a 0.4 percent rise in both September and August. At the earlier stages of processing, prices received by manufacturers of intermediate goods moved up 1.2 percent in October, and the crude goods index increased 4.3 percent. On an unadjusted basis, prices for finished goods advanced 4.3 percent for the 12 months ended October 2010, their largest year-over-year gain since a 5.1 percent rise in May 2010.
 

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Details at different stages of processing include:

Finished goods -- The increase in the index for finished goods can be traced to prices for finished energy goods, which moved up 3.7 percent. By contrast, the indexes for both finished goods less foods and energy and for finished consumer foods decreased, falling 0.6 percent and 0.1 percent, respectively.

Intermediate goods -- This index increased 1.2 percent in October, its third straight monthly advance. The October rise in the intermediate goods index was broad based, with energy prices climbing 3.2 percent; the index for intermediate materials less foods and energy increased 0.6 percent, and prices for foods and feeds moved up 1.3 percent. On a 12-month basis, the index for intermediate goods climbed 6.4 percent in October, its eleventh consecutive year-over-year increase.

Crude goods -- The crude-goods index rose 4.3 percent in October. For the three months that ended in October, crude goods prices increased 6.2 percent. In October, nearly half of the monthly advance is attributable to the index for crude energy materials, which climbed 5.4 percent. Also contributing to the broad-based rise in crude goods prices, the indexes for crude foodstuffs and feedstuffs and for crude nonfood materials less energy moved up 4.2 percent and 2.1 percent, respectively.
 

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In the case of forest products sector PPIs that we track, most indices appear to be either in the process of breaking off their earlier declines, or are beginning/continuing to move higher. Prices are all higher than year-earlier levels, although the rate of growth has slowed in several cases.
 

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October 2010 Industrial Production, Capacity Utilization and Capacity

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Industrial production was unchanged in October after having fallen 0.2 percent in September. Manufacturing output gained 0.5 percent in October. Factory production in September was initially reported to have decreased 0.2 percent, but incoming data on steel, fabricated metal products, machinery, and chemicals resulted in a revision to +0.1 percent. At 93.4 percent of its 2007 average, total industrial production in October was 5.3 percent above its year-earlier level.

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Industrial production among forest products manufacturers increased in October; Wood Products gained 2.5 percent while Paper rose by 0.6 percent.
 

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October’s all-industry capacity utilization rate was flat at 74.8 percent, a rate 6.6 percentage points (9.7 percent) above the low in June 2009 and 5.8 percentage points below its average from 1972 to 2009. Forest products manufacturing capacity utilization rose for both sectors: 3.1 percent for Wood Products and 0.8 percent for Paper.
 

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Capacity at the all-industries level was flat in October, but fell in both Wood Products and Paper sectors.

October 2010 U.S. Treasury Statement and September TIC Flows

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U.S. fiscal year 2011 started out with federal outlays of $286.4 billion and receipts of $146.0 billion in October, resulting in a $140.4 billion federal budget deficit.
 

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The shortfall between receipts and outlays has to be made up from somewhere, and borrowing from overseas is one of the main ways of accomplishing that. According to the Treasury International Capital (TIC) accounting system, net foreign inflows jumped to nearly $81.7 billion in September (from $11.2 billion in August), which helped pull the most recent three-month average rate up to the $57.6 billion mark. While September’s increase is encouraging, the three-month average is still below the $70 billion per month typical of the period between January 2002 and August 2007 (the date of the first financial scare).
 

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In September foreigners sold $24.9 billion more of short-term securities (e.g., Treasury bills) than they bought, dropping the three-month average net inflows for that category to just shy of $6.0 billion.
 

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At the same time, however, they purchased more ($91.4 billion) long-term debt. Net inflows into long-term public debt (e.g., Treasury bonds) rose by another $70.1 billion in September (down from $121.8 billion in August), bringing the three-month average rate to $79.7 billion. Flows into private equities grew by $21.3 billion in September, bringing the three-month average to $20.9 billion.
 

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The amount of U.S. public debt held by foreigners continued its march upward in September. Japan purchased the most ($28.4 billion), followed by China ($15.1 billion); the Caribbean banking centers shed $15 billion.

Central banks hold the “lion’s share” of Treasury securities, although the private sector has become much more active during the past several months. Private holdings have increased by more than 68 percent during the past year and now represent over one-third of total foreign holdings of Treasury debt.
 

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What these charts do not indicate, since they are oriented toward inflows of foreign money, is that the Federal Reserve is now the second largest owner of U.S. Treasuries. The Fed overtook Japan earlier in October, leaving China as the only country with greater ownership of U.S. debt. Since the Fed is “monetizing” that debt (i.e., “printing” money to buy Treasuries), we believe inflation could become much more of an issue as time progresses.

November 2010 Macro Pulse - Cassandras of the Double Dip

For those whose memory of Greek mythology is at best a bit foggy, Cassandra was a prophetess who was cursed so that her predictions - though correct - were never believed. Our prediction since 2H2008 of another recession to follow fairly closely on the heels of the one that officially ended in June 2009 has not always been well received. In October, Ed Leamer, director of the UCLA Anderson Forecast, even coined the pejorative “Cassandras of the double dip” to describe those like us who expect a second downturn. Obviously the jury is still out on whether our view or some other more-optimistic alternative will be vindicated and thus should have been believed, but our reading of the last month’s economic “tea leaves” gives us little reason to change our forecast.

For example,....

Click here to read the entire November 2010 Macro Pulse.

The Macro Pulse blog is a commentary about recent economic developments that affect the forest products industry. That commentary provides context for our 24-month forecast, which is contained in the monthly Economic Outlook newsletter available through Forest2Market. The monthly Macro Pulse newsletter summarizes and gives a convenient point of access to the previous 30 days of commentary available on this website.

September 2010 Personal Income and Outlays, Retail Sales and Consumer Debt

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Bureau of Economic Analysis data showed that disposable personal income (DPI) decreased by $20.3 billion (-0.2 percent) in September -- the first drop since July 2009, while personal consumption expenditures (PCE) rose by $17.3 billion (+0.2 percent) -- the smallest gain in 3Q2010. Real (i.e., inflation-adjusted) DPI decreased 0.3 percent in September; real PCE increased 0.1 percent.

Much of the September drop in personal income resulted from a $25.5 billion (annualized) reduction in unemployment compensation transfer payments. Excluding emergency government unemployment insurance benefits, personal income increased 0.1 percent.
 

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Given the rise in PCE, it comes as no surprise that retail sales also jumped (+0.6 percent) in September. The largest percentage increase occurred in vehicle sales, but the “other” category exhibited the largest absolute change (+$1.183 billion). Furniture stores (+0.5 percent) were also beneficiaries of the gain in retail sales, as were hardware stores (+0.6 percent).
 

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Cheaper borrowing costs likely helped push total consumer debt outstanding $2.1 billion (1.1 percent, annualized) higher in September -- the first monthly increase since January and the largest increase in two years. Revolving credit (e.g., credit cards) fell by $8.2 billion -- the twenty-fifth monthly decline, but non-revolving credit (e.g., college and auto loans) jumped by $10.4 billion.

October 2010 Employment Report

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The U.S. economy added 151,000 nonfarm jobs in October, exceeding most economists’ expectations. Despite the net job gain, the official unemployment rate remained steady at 9.6 percent. So far this year, payrolls have expanded by 874,000 jobs (1 million in the private sector), but that came after the nation lost more than 8 million jobs in 2008 and 2009.
 

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October was the first month this year in which changes in temporary government staffing for the 2010 census played almost no role. About 6,000 enumerators remained on the federal payroll when the employment survey was conducted for October, down from a peak of 586,000 in May.
 

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Other results from the report include:

• Average hourly earnings increased 1.7 percent in October from the same month last year. Earnings rose to $22.73 from $22.68 in the prior month.  
• The average work week for all workers rose to 34.3 hours, from 34.2 hours in September.  
• Government payrolls decreased by 8,000, borne mainly by local governments.  
• The underemployment rate -- which includes part-time workers who would prefer a full-time position and people who want work but have given up looking -- was little changed at 17 percent after 17.1 percent in the prior month.  
• Long-term unemployment increased. The number of people unemployed for 27 weeks or more increased as a percentage of all jobless, to 41.8 percent.  

"This [jobs report] is very optimistic news and it comes in the wake of other fairly good news," Nariman Behravesh chief economist at IHS Inc. in Lexington, Massachusetts. "It looks like [during] the last month or so things have started to move upward again, and the momentum is hopefully building." But, as Stephen Stanley cautioned, "It's just going to take a long time to bring the unemployment rate down to more acceptable levels."

As we have indicated in the past, at least 100,000 jobs need to be created each month just to keep up with population growth. Since nonfarm employment bottomed out last December, job creation has averaged about 87,4000 per month. Thus, the pace of hiring will have to increase dramatically to not only keep up with new workers entering the work force for the first time, but also to once again make those 7+ million still-displaced workers productive.

September 2010 Manufacturers’ Shipments, Inventories and New Orders

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Shipments, inventories and new orders at the total manufacturing level all posted gains in September, according to the U.S. Census Bureau.
 

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Shipments, up two of the last three months, increased $1.7 billion (0.4 percent) to $418.2 billion. Durable goods shipments decreased $0.3 billion (0.1 percent) to $198.2 billion -- led by computer and electronic products -- but nondurable goods increased $1.9 billion (0.9 percent) to $220.0 billion. Chemical products led the increase in nondurable shipments.

Shipments of solid wood products declined by 1.7 percent, while paper products increased by 0.6 percent.
 

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Data from the Association of American Railroads indicated double-digit monthly percentage gains in rail shipments during September. But, the Ceridian-UCLA Pulse of Commerce Index (which measures diesel consumption of over-the-road trucking) fell by 0.5 percent. "The PCI tells us that inventory is stalled on the nation's thoroughfares," said Ed Leamer, chief PCI economist and director of the UCLA Anderson Forecast. "The good months of growth are now seemingly in our rear view mirror. Our economy's loss in traction is alarming and for the ‘Cassandras of the double-dip,' may foretell a coming decline in GDP and spike in unemployment. However, with residential investment, consumer durables, business spending, and other component indicators already at or near record lows relative to GDP, it remains unlikely that we will experience an outright decline into recession."
 

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Inventories, up eight of the last nine months, increased $3.5 billion (0.7 percent) to $531.2 billion. Durable goods inventories increased $1.5 billion (0.5 percent) to $314.7 billion; transportation equipment experienced the largest increase. Inventories of nondurable goods increased $1.9 billion (0.9 percent) to $216.4 billion, led by petroleum and coal products.

Inventories of both wood and paper products increased by 0.2 percent in September.
 

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New orders constitute the forward-looking portion of the Census Bureau’s report, and give an indication of what may be in store for the manufacturing sector. New orders for manufactured goods increased $8.8 billion (2.1 percent) to $420.0 billion in September. Excluding transportation, new orders increased 0.4 percent.

Durable goods orders increased $6.8 billion (3.5 percent) to $200.0 billion, led by transportation equipment. New orders for manufactured nondurable goods increased $1.9 billion (0.9 percent) to $220.0 billion.

October 2010 ISM Reports

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With a 2.5 percentage point increase (to 56.9 percent) in its PMI, manufacturing expanded at a faster pace in October, according to the Institute for Supply Management (ISM). "The manufacturing sector grew during October, with both new orders and production making significant gains,” said Norbert Ore, chair of ISM’s Manufacturing Business Survey Committee. “Since hitting a peak in April, the trend for manufacturing has been toward slower growth. However, this month's report signals a continuation of the recovery that began 15 months ago, and its strength raises expectations for growth in the balance of the quarter. Survey respondents note the recovery in autos, computers and exports as key drivers of this growth. Concerns about inventory growth are lessened by the improvement in new orders during October. With 14 of 18 industries reporting growth in October, manufacturing continues to outperform the other sectors of the economy."

Wood Products remained essentially static in October; the only reported change was an uptick in employment. The expansion in Paper Products encompassed production, employment and new export orders.
 

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The non-manufacturing sector also grew more quickly, thanks to a 1.1 percentage point (to 54.3 percent) increase in the NMI/PMI. None of the specific service industries we track shared in that expansion, however. Like Wood Products, Real Estate was unchanged; Construction and Ag & Forestry both contracted.

Manufacturers’ input prices were relatively stable in October, rising 0.5 percentage point, but prices paid by the service sector jumped a whopping 8.2 percentage points. Relevant commodities up in price included coated freesheet, corrugated containers, lumber, fuel (both diesel and gasoline) and transportation. No relevant commodities were down in price.

Coated groundwood was the only relevant commodity described as in short supply.

October 2010 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate crude oil jumped by $6.59 (8.8 percent) in October, to $81.90 per barrel. That price increase coincided with a weaker dollar, a consumption increase of 414,000 barrels per day (BPD) -- to nearly 19.7 million BPD -- during August, but occurred despite persistently high (and rising) crude stocks.
 

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The Obama administration, under heavy pressure from the oil industry and Gulf states, on October 12 lifted the deep-water drilling moratorium it imposed in April. The ban had been scheduled to expire on November 30, but Interior Secretary Ken Salazar moved up the deadline, saying new rules have strengthened safety and reduced the risk of another catastrophic blowout. The prohibition likely caused a temporary loss of 8,000 to 12,000 jobs in the Gulf region and drilling is unlikely to resume for at least a few weeks.

Todd Hornbeck, CEO of Covington, La.-based Hornbeck Offshore Services, said lifting the ban would still leave the industry in a "de facto moratorium stage" until the government fully explains how new drilling permits will be issued. "We're still in the dark," said Hornbeck, who heads one of the companies that provides vessels and other services for the offshore industry. "Right now, I'm skeptical that it will be anytime soon that permits will be issued," he said.

Though the administration's policy only addressed deep water operations, "severe bottlenecks in the federal permit review process have resulted in a de facto moratorium for shallow water drilling," Louisiana Governor Bobby Jindal said. Only 12 new permits have been issued for shallow water wells Since early June, compared to the pre- moratorium average of 10 to 14 a month.

October 2010 Currency Exchange Rates

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The U.S. dollar’s rate of depreciation picked up speed in October, falling by 1.4 percent against Canada’s “loonie,” 5.7 percent against the euro and 3.0 percent against the yen. On a trade-weighted index basis, the dollar gave up 2.6 percent against a basket of 26 currencies.

Probably the biggest reasons for the dollar’s October slide were the markets’ expectations of further quantitative easing by the Federal Reserve and the outcome of the Group-of-20 (G-20) meeting in late October. The G-20’s joint communiqué said that a global economic recovery is underway but remains uneven. Officials warned of the need to move toward more “market-determined” currency exchange rates that reflect underlying economic fundamentals, and pledged to “refrain from competitive devaluation of currencies.”

“The G-20 final statement could be seen as a fragile truce in the so-called [currency exchange] war issue,” said Roberto Mialich, foreign-exchange strategist at UniCredit Bank in Milan. “But with the Fed decisions on [quantitative easing] still pending these efforts may not be enough to help…the beleaguered U.S. dollar.”
 

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Canada: The loonie may have received a modicum of additional support from Canada’s expanding economy. Real GDP increased by 0.3 percent in August, lifted mainly by oil and gas extraction, wholesale trade, and manufacturing. Not everyone agrees with that explanation, however. "The details [of the GDP report] don't show broad-based gains," said Jonathan Basile, VP of economics at Credit Suisse Securities, in a note. “Canadians basically bought cars, filled them with gas to go to the supermarket and to shop for some home furnishings (which only partly reversed a record drop). Most other sales categories were either up a little or down.”

Europe: Monetary policies that work for the entire European Union are becoming increasingly difficult to create as member countries continue to diverge into two tiers. One tier -- perhaps best represented by Germany -- is expanding and the other -- composed primarily of the southern, “Club Med” states -- is contracting. The currency market has chosen to ignore to the ongoing problems among the contracting members (e.g., stalled budget talks in Portugal and renewed debt woes in Greece) and concentrated on “lift” the regional economy is garnering from Germany.

Japan: The yen strengthened despite a 1.9 percent drop in industrial production during September (the fourth straight month of decline), continued “jawboning” by Japanese officials, and promises of even more stimulus spending. Instead, the markets appear to have justified the yen’s appreciation on the basis of the rise in Japan’s trade surplus. That surplus was $9.8 billion in September, 54 percent above year-earlier levels.

September 2010 U.S. Construction

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Overall construction spending in the United States unexpectedly rose to $801.7 billion in September, led by increases in homebuilding and public projects. The 0.5 percent gain was made possible by a $14.4 billion downward revision to August’s estimates that turned a previously reported gain of 0.4 percent into a 0.2 percent drop.
 

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Estimates of the changes in private residential spending and the number of total housing starts agreed for once in September. Private residential spending rose 1.8 percent, while the number of total starts rose 0.3 percent to 610,000 -- a five-month high.. "At least we're making some progress here," said John Herrmann, senior fixed income strategist at State Street Global Markets in Boston. "It's a slow, steady-as-she-goes improvement in builder activity."
 

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All of the September gain in private residential starts was concentrated in the single-unit component (4.4 percent), as multi-family starts fell by 9.7 percent. On an annual-change basis, total starts were up 4.1 percent in September.
 

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Despite a 6.6 percent jump in new-home sales, substantially more houses were started than sold. The ratio of starts to sales hovered around 1.5 in September -- near the upper end of the “normal” historical range. On a more positive note, however, an uptick in completions did not prevent both the number of new homes for sale and months of inventory from declining.
 

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Existing home sales jumped by an even greater amount (10.0 percent) than that for new homes, shrinking the inventory of existing homes and causing the proportion of total sales represented by new homes to drop to near 6 percent. The lowest mortgage rates on record and cheaper homes (the median resale price dropped 3.3 percent, to $171,700) appear to be luring some buyers off the sidelines.

Even with the jump in resales, however, “...[the market is] still at a remarkably depressed level,” said Tom Porcelli, senior economist at RBC Capital Markets Corp. in New York. “We’re going to continue to muddle along here, given the supply- demand imbalance.”
 

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The seasonally adjusted S&P/Case-Shiller home price indices moved lower in every market except New York City between July and August.

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“A disappointing report,” remarked David Blitzer, Chairman of the Index Committee at Standard & Poor’s. “Home prices broadly declined in August. Seventeen of the 20 cities and both Composites saw a weakening in [not-seasonally adjusted] year-over-year figures, as compared to July, indicating that the housing market continues to bounce along the recent lows. Over the last four months both the 10- and 20-City Composites show slowing growth, after sustaining consistent gains since their April 2009 troughs.

“The month-over-month growth rates tell the same story. Fifteen of the 20 metropolitan statistical areas and the two Composites saw a decline in the month of August as compared to July levels. The 10- and 20-City Composites fell 0.1 percent and 0.2 percent, respectively. Indeed, the housing market appears to have stabilized at new lows. At this time, it does not seem that any of the markets are hanging on to the temporary momentum caused by the homebuyers’ tax credits.”
 

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