October 2010 International Trade

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According to data compiled by the Netherlands Bureau for Economic Policy Analysis, world trade volume grew by 0.5 percent in October from the previous month, following an upwardly revised decrease of 0.4 percent in September. October’s regional patterns were rather diverse: Import growth was highest in emerging Asia. United States imports declined for a second consecutive month, while its exports shot up by 3.5 percent. In Latin America both imports and exports declined substantially (by 4 percent to 5 percent).

Because monthly trade figures are volatile, it may be more useful to concentrate on “momentum” (defined as the change in the three-month moving average). Trade momentum flat in October. It has been decreasing steadily since January, when it reached 6.1 percent. Third quarter world trade growth has been revised down from 0.9 percent to 0.3 percent (non-annualized) using new information on trade prices in major Asian and Latin American countries. As a result, volume estimates for these countries turned out to be considerably lower over the last couple of months.

Although the trade volume increase was rather muted in October, price changes were less so. Prices jumped over 3 percent between September and October, and are up almost 5.2 percent from July 2010.
 

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As mentioned above, the U.S. goods and services deficit shrank to $38.7 billion, down from a revised $44.6 billion deficit in September. Total October exports were $158.7 billion and imports were $197.4 billion.
 

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U.S. paper exports rose by 172,000 metric tons (6.1 percent) while imports fell by 25,000 tons (-5.9 percent). Both imports and exports remained above year-earlier levels.
 

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Softwood lumber exports did not contribute to the narrowing trade deficit in October, as exports shrank (by 11 MMBF, or 8.8 percent) while imports expanded (27 MMBF, or 3.7 percent). However, lumber exports remain above year-earlier levels; imports are lower.

3Q2010 Gross Domestic Product: Third 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 2.6 percent annual rate (the original estimate was 2.0 percent), up from 1.7 percent in the previous quarter.
 

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At first glance, the upward revision seems encouraging. Digging into the details reveals a somewhat different story. Dean Baker, co-director of the Center for Economic and Policy Research in Washington, D.C., explains why:

“While the rate of GDP growth was revised up, the rate of final demand growth was revised down. Final demand, which is GDP excluding inventory accumulations, grew at just a 0.9 percent annual rate in the third quarter, the same as its growth rate in the second quarter. The reason that GDP growth was revised upward was a more rapid reported growth in inventories.

“The reported rate of inventory accumulation in the third quarter was $121.4 billion (in 2005 dollars), the fastest pace ever. This added more than 1.6 percentage points to the rate of GDP growth in the quarter.

It is very unlikely that this pace of inventory growth will be sustained…, because the upward revision to GDP growth was based on more rapid accumulation of inventories it should not be viewed as a positive for the economy’s growth prospects.

“Inventories have been growing rapidly and contributing to the growth in GDP, but if historical trends persist, that growth is about to come to an end. When it does, the growth rate of GDP will slow down unless some other component of GDP grows faster to compensate. However, it’s hard to see how that will happen. The original stimulus package is coming to an end in the first two quarters of 2011, state and local governments continue to face large budget shortfalls, housing prices are still falling which will continue to place a drag on consumption, businesses are waiting for positive news about the economy -- business investment will follow the economy, not lead -- government is being pushed toward deficit reduction, Europe is struggling, and when these and other factors acting as headwinds against GDP growth are factored in, it’s hard to be optimistic about growth in coming quarters. Note also that a 2.6 percent growth rate, while close to the historical average, only helps us to tread water. A 2.6 percent growth rate keeps us from losing more ground, but it is not fast enough to make up for past losses. Thus, even the 2.6 percent rate was less than we need.

“Let’s hope this pessimistic view of our prospects for growth in coming quarters is wrong, but it’s hard to see how the 2.6 percent growth rate we had in the third quarter can continue unless some other sector of the economy grows at an unexpectedly high rate.”

November 2010 Consumer and Producer Price Indices

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The seasonally adjusted Consumer Price Index for All Urban Consumers (CPI-U) increased 0.1 percent in November. Over the last 12 months, the all items index increased 1.1 percent.

The indexes for food, energy, and all items less food and energy all increased slightly in November. Although the index for gasoline rose, the index for household energy declined and the increase in the energy index was the smallest in five months.

The index for all items less food and energy rose in November after being unchanged the previous three months. Increases in the indexes for shelter and airline fares accounted for most of the rise, while the indexes for new vehicles, used cars and trucks, and household furnishings and operations all declined.

Over the last 12 months, the index for all items less food and energy has risen 0.8 percent. The energy index has risen 3.9 percent over that span with the gasoline index up 7.3 percent but the household energy index down 0.2 percent. The food index has risen 1.5 percent, with the food at home index up 1.7 percent.

The seasonally adjusted Producer Price Index for Finished Goods (PPI) increased 0.8 percent in November. This increase followed a 0.4-percent advance in both October and September. At the earlier stages of processing, prices received by manufacturers of intermediate goods climbed 1.1 percent in November, and the crude goods index moved up 0.6 percent. On an unadjusted basis, prices for finished goods rose 3.5 percent for the 12 months ended November 2010, their smallest 12-month increase since a 3.1-percent advance in August.
 

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Details at different stages of processing include:

Finished goods -- About two-thirds of the November advance in the finished goods index can be traced to prices for energy goods, which rose 2.1 percent. Also contributing to the broad-based November increase in the finished goods index, prices for consumer foods and for goods other than foods and energy advanced 1.0 percent and 0.3 percent, respectively.

Intermediate goods -- This index moved up 1.1 percent in November, its fourth consecutive monthly increase. The November advance was broad-based, with prices for intermediate energy goods rising 2.8 percent, the index for intermediate materials less foods and energy increasing 0.7 percent, and prices for intermediate foods and feeds climbing 1.9 percent. On a 12-month basis, the index for intermediate goods moved up 6.3 percent in November.

Crude goods -- The crude-goods index rose 0.6 percent in November. For the 3 months ended in November, crude goods prices increased 4.3 percent following a 2.3-percent advance for the 3 months ended in August. Leading the monthly November rise, the index for crude nonfood materials less energy climbed 3.1 percent. Also contributing to higher crude goods prices, the index for foodstuffs and feedstuffs moved up 0.7 percent. By contrast, prices for crude energy materials decreased 1.3 percent.
 

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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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November 2010 Industrial Production, Capacity Utilization and Capacity

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Industrial production increased 0.4 percent in November after a decline of 0.2 percent in October. The rate of change for industrial production was revised down in October but up in September; the net effect of the revisions from June to October left the level of industrial production in October about the same as was previously reported. Output advanced 0.3 percent in the manufacturing sector, with gains in both durables and nondurables. The gains among durable goods industries were particularly broad-based; only the production of motor vehicles and parts decreased substantially. Excluding motor vehicles and parts, overall factory output advanced 0.7 percent. At 93.9 percent of its 2007 average, total industrial production in November was 5.4 percent above its level a year earlier. Industrial production among forest products manufacturers increased by 1.5 percent or more in November.
 

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November’s all-industry capacity utilization rate rose to 75.2 percent (a 0.4 percent gain from October), a rate 5.4 percentage points below its average from 1972 to 2009. Forest products manufacturing capacity utilization rose for both sectors: 2.2 percent for Wood Products and 1.7 percent for Paper.
 

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Capacity at the all-industries level was essentially flat for a third month in November, but fell in both the Wood Products and Paper sectors.

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

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The red ink deepened in November (the second months of U.S. fiscal year 2011) as outlays of $299.4 billion and receipts of $149.0 billion resulted in a $150.4 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, however, net foreign inflows plunged to just $7.5 billion in October (from $80.1 billion in September), which helped pull the most recent three-month average rate down to the $38.5 billion mark. That three-month average is well 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 October foreigners bought up $31.4 billion in short-term securities (e.g., Treasury bills), slightly more than offsetting the net sale of $25.5 billion in September. Thus, the three-month average net inflow remained essentially unchanged at $12.1 billion.
 

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A substantial share of the retreat in net TIC flows resulted from the sizeable drop-off in purchases of long-term paper. Purchases of long-term public debt (e.g., Treasury bonds) fell to $37.7 billion (down from $69.4 billion in September), bringing the three-month average rate to $76.2 billion. Flows into private equities fell by a more modest $3.1 billion in October, bringing the three-month average to $17.4 billion.
 

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The amount of U.S. public debt held by foreigners is homing in on $4.5 trillion. China was the largest foreign purchaser of Treasury debt in October ($23.3 billion), followed by the United Kingdom ($18.6 billion) and Japan ($12.8 billion); OPEC shed $7.6 billion.
 

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As of October, the Federal Reserve was rapidly catching up with Japan and China in terms of U.S. Treasury holdings. It held $838 billion in Treasuries at the end of October, approximately $63 billion more than a year earlier; $26 billion of that difference ($312 annualized) was picked up just between September and October. China’s holdings remained lower than a year earlier, but it too was a strong purchaser in October. The pace of Japan’s purchases was fairly stable, whereas the pace of U.K. purchases trended lower in October; most of what the U.K. has now was acquired earlier in the past year.

More recent Federal Reserve data shows it has ramped up purchases of U.S. Treasury debt since October, and held nearly $968 billion as of mid-December.

December 2010 Macro Pulse – Eye of the Storm?

Before the days of Doppler radar and other tools of the meteorological trade, residents of the Atlantic seaboard and Gulf coast sometimes confused the eye of a hurricane with the storm’s end. Lulled into a false sense of security by the improved conditions, they mistakenly resumed their normal activities only to find themselves exposed when the backside of the storm arrived. We view the current economic situation as the eye of the recessionary “hurricane” that began in December 2007. Improvement among some indicators (e.g., the uptick in 3Q2010 GDP to 2.5 percent, and October’s increase in orders for non-durable goods) have convinced many investors that nothing but sunshine and seashells lies in their future. Worse, many economic “meteorologists” -- who should know better because of the (even if crude) forecasting tools at their disposal -- are sounding the “all clear” and encouraging their audiences to ignore the cloudbanks gathering on the horizon.


To what “cloudbanks” do we refer? Click here to find out by reading the entire December 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 the previous 30 days of commentary available on this website.

October 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) increased $48.3 billion (0.4 percent) in October, while personal consumption expenditures (PCE) increased by a slightly smaller $44.0 billion (also 0.4 percent). Real (i.e., inflation-adjusted) DPI increased 0.3 percent in October, reversing September’s decrease of 0.2 percent. Real PCE increased 0.3 percent, following on the heels of an increase of 0.2 percent.
 

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Retail sales rose by 1.2 percent during October, their largest gain in seven months. Motor vehicles posted the largest percentage gain (5.0 percent), but the “Other” category exhibited the largest absolute change ($4.4 billion).
 

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Consumers appear to be taking on more debt. Total consumer debt outstanding increased for a second month in October, at an annual rate of 1.7 percent. Revolving credit (i.e., credit cards) decreased at an annual rate of 8.4 percent -- the 26th consecutive monthly decrease, while nonrevolving credit increased at an annual rate of 6.8 percent.

Looking at just the “top” line might lead one to conclude that consumers are opening up their wallets. For example, “Consumer finances are progressively improving, which is a good thing, but maybe not as much as these numbers indicate,” said Gregory Daco, a senior economist at IHS Global Insight in Lexington, Massachusetts. “We still have a lot of deleveraging going on, but the rate is slowing down. The conditions for consumers are slowly improving.” Looking at the report details tells a different story, however. In fact, all of the increase was due to a $31.9 billion jump in Federal Government debt used to fund student loans. Ex-federally funded student loans, consumer credit declined by about $28 billion.

October 2010 U.S. Construction

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Overall construction spending in the United States rose by $5.2 billion (0.7 percent), to a seasonally adjusted and annualized rate $802.3 billion during October. Nominal spending remains on par with levels first set back in 2000.

Most of September-to-October increase occurred because September’s spending estimate was revised downward by $4.6 billion; i.e., had September’s estimate remained unrevised, October’s growth would have been only $0.6 billion. That said, the increase was fairly broad-based. Only private non-residential construction spending fell in October.
 

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Private residential spending and the number of total housing starts marched to different drummers once again in October. Although spending increased, the number of units started plummeted to 519,000 (SAAR) -- a drop of 11.7 percent. That represents the fewest starts since a record low reached in April 2009 and 12 percent less than the downwardly revised estimate of 588,000 total starts in September. Most of the retreat resulted from a 43.5 percent drop in the number of multi-family units started. The number of total starts is 77 percent below the January 2006 peak, within 2 percentage points of the all-time low set back in April 2009.
 

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"Starts are a reminder of just how miserable the situation is in housing," said Chris Low, chief economist at FTN Financial in New York. "Sales have been so weak for so long that we continue to see starts bouncing along the bottom."
 

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New-home sales were also disappointing, falling by 8.1 percent. "Conditions in the housing market remain challenged," said John Herrmann, a senior fixed-income strategist at State Street Global Markets LLC in Boston. "Lending conditions remain tight and there is concern that there's another down leg in home prices."
 

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Because sales are so depressed, even the slow rates of starts and completions are sufficient to keep the unsold inventory of new homes elevated. The number of months required to clear existing inventories has remained at/above eight months since April.
 

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Existing home sales reversed course in October, breaking a two-month run of increasing activity. There are two likely explanations for that turn of events: One is that the foreclosure mess has caused potential buyers to become wary of purchasing a foreclosed home for fear that possible legal conflicts might prevent them from obtaining clear title. The other is that foreclosed properties are being sold at such a large -- and growing -- discount (on average, 32 percent below the price of comparable homes not in the foreclosure process), buyers can sit on the sidelines waiting for more attractive offerings.

Because new home sales also declined, however, the proportion of total sales represented by new homes fell to 6 percent in October.
 

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Although existing home prices have been declining, they have not returned to the lows seen in early 2009 and again in early 2010. Nevertheless, the National Association of Realtors’ (NAR) housing affordability index rose to an all-time high in October. Of course, the median home price is not the only factor influencing affordability; mortgage rates and family incomes are also important variables in that calculation. Interest rates have been falling and incomes rising since early 2010.

The seasonally adjusted S&P/Case-Shiller home price indices have also been declining since July. That trend was particularly noticeable in September (the latest data available), as only Washington, DC posted a monthly gain.
 

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“Another weak report; weaker than last month,” was how David Blitzer, chair of the Index Committee at Standard & Poor's characterized the Case-Shiller indices for September. “The national index is down 1.5 percent from 3Q2009 and 15 of 20 cities are down over the last 12 months. Other than Tampa, FL, there are no new lows this month but many analysts will argue that a double dip will be confirmed before Spring. While some of the bad numbers may reflect the end of the government’s tax incentive for first time homebuyers, there are other problems weighing on the housing market. The national economy is certainly the number one issue for housing. Additionally, there is a large supply of houses on the market and further, hidden, supply due to delinquent mortgages, pending foreclosures or vacant homes. New construction is running at less than half the pace needed to meet normal demand, so a sustained recovery could be a ways off.

“Looking deeper into the data, in the monthly indices, 18 MSAs and both Composites were down in September over August” Blitzer continued. This is worse than August when 15 were down month-to-month. The only two which weren’t down in September [on a seasonally unadjusted basis] were Las Vegas, which managed to stay a touch above the low set in July, and Washington DC. Overall, there are few, if any, good numbers in this month’s data.”
 

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November 2010 Employment Report

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The U.S. economy added only 39,000 nonfarm jobs in November. Much of that gain was made possible because October’s initial estimate was revised from +172,000 to +151,000. Because of October’s weak showing, the official unemployment rate rose by 0.2 percentage point, to 9.8 percent.

So far this year, payrolls have expanded by 937,000 jobs (1.16 million in the private sector), but that came after the nation lost more than 8 million jobs in 2008 and 2009. As we have indicated repeatedly, 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 85,1000 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.
 

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After seasonal and other adjustments, public sector employment shrank, but those losses were concentrated at the local level; governments at the state and federal levels added employees.
 

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In terms of the change from peak non-farm employment, the U.S. economy is very nearly back to where it stood in May 2010.

Other results from the report include:

• Full-time employment shrank by another 478,000 jobs in November. More than half of the full-time jobs gained back between December 2009 and May 2010 have been lost once again.
• Among the unemployed, the number of job losers and persons who completed temporary jobs rose by 390,000 to 9.5 million. The number of long-term unemployed (those jobless for 27 weeks and over) was little changed at 6.3 million and accounted for 41.9 percent of the unemployed. 
• The civilian labor force participation rate held at 64.5 percent in November, and the employment-population ratio was essentially unchanged at 58.2 percent. 
• The number of persons employed part time for economic reasons was little changed at 9.0 million. These individuals were working part time because their hours had been cut back or because they were unable to find a full-time job.
• About 2.5 million persons were marginally attached to the labor force, up from 2.3 million a year earlier. These individuals were not in the labor force, but wanted and were available for work, and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the four weeks preceding the survey.
•  Among the marginally attached, there were 1.3 million discouraged workers in November, an increase of 421,000 from a year earlier. Discouraged workers are persons not currently looking for work because they believe no jobs are available for them. The remaining 1.2 million persons marginally attached to the labor force had not searched for work in the four weeks preceding the survey. 
• The average workweek for all employees on private nonfarm payrolls held at 34.3 hours. The manufacturing workweek for all employees also was unchanged, at 40.3 hours, and factory overtime remained at 3.1 hours. The average workweek for production and nonsupervisory employees on private nonfarm payrolls decreased by 0.1 hour to 33.5 hours.
•  Average hourly earnings of all employees on private nonfarm payrolls increased by one cent to $22.75. Over the past 12 months, average hourly earnings have increased by 1.6 percent. In November, average hourly earnings of private-sector production and nonsupervisory employees were unchanged at $19.19.

November 2010 ISM Reports

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With a 0.3 percentage point decrease (to 56.6 percent) in its PMI, manufacturing expanded at a slightly slower pace in November, according to the Institute for Supply Management (ISM). "The manufacturing sector grew during November, with both new orders and production continuing to expand,” said Norbert Ore, chair of ISM’s Manufacturing Business Survey Committee. “With the PMI at 56.6 percent, November's rate of growth is the second fastest in the last six months [but well off the pace seen between March and May]. Exports and imports continue to support expansion in the sector. Prices moderated slightly during the month, but comments from the respondents express concerns with regard to pricing pressures. The list of commodities in short supply increased, though short supply items are not yet posing significant problems. Manufacturing continues to benefit from the recovery in autos, but those industries reliant upon housing continue to struggle."

Wood Products reported no change in November, while the only real bright spots for Paper Products involved rising new export orders and slowing imports.
 

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The pace of growth of the non-manufacturing sector picked up in November, thanks to a 0.7 percentage point (to 55.0 percent) increase in its NMI/PMI. Construction was the only service industry among those we track to share in that expansion, however. Like Wood Products, Real Estate was unchanged for a second month; Ag & Forestry contracted.

Input prices of both manufacturers and service industries rose at a slower pace, which is surprising in light of the lengthening lists of commodities reportedly up in price. E.g., caustic soda, chemicals, corrugated containers, fuel and paper were among the commodities up in price. The only relevant commodity down in price was paper rolls. Coated freesheet and coated groundwood were described as in short supply.

October 2010 Manufacturers’ Shipments, Inventories and New Orders

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Shipments and inventories at the total manufacturing level both posted gains in October, according to the U.S. Census Bureau, but new orders retreated.

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Total shipments, up three of the last four months, increased $1.5 billion (0.3 percent) to $421.0 billion. Shipments of durable goods decreased $1.8 billion (0.9 percent) to $196.6 billion, led by machinery. Nondurable goods shipments more than offset that decline, however, increasing $3.2 billion (1.5 percent) to $224.4 billion. Petroleum and coal products drove the nondurable increase.

Shipments of solid wood products rose by 2.8 percent, while paper products declined by 0.6 percent.
 

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Data from the Association of American Railroads indicated double-digit monthly percentage drops in rail shipments during October. The Ceridian-UCLA Pulse of Commerce Index (which measures diesel consumption of over-the-road trucking) also fell by 0.6 percent. So, although the value of shipments rose in October, the volume of goods shipped appears to have fallen.
 

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Total inventories, up nine of the last ten months, increased $4.7 billion (0.9 percent) to $538.2 billion in October. Durable goods inventories increased $1.5 billion (0.5 percent) to $316.9 billion, led (again) by machinery. Inventories of nondurable goods increased $3.2 billion (1.5 percent) to $221.3 billion; petroleum and coal products drove the nondurable goods increase.

Inventories of wood products dropped by 1.0 percent, but paper products increased by 0.4 percent.
 

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New orders, down following three consecutive monthly increases, decreased $3.6 billion (0.9 percent) to $420.1 billion. Excluding transportation, new orders decreased 0.2 percent. Orders for durable goods decreased $6.9 billion (3.4 percent) to $195.7 billion. Transportation equipment experienced the largest decrease ($2.8 billion or 5.2 percent). Nondurable goods orders increased $3.2 billion (1.5 percent) to $224.4 billion.

November 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 $2.24 (2.7 percent) in November, to $84.14 per barrel. That price increase occurred despite a slightly stronger dollar, a similarly modest drop in consumption of 185,000 barrels per day (BPD) -- to just over 19.5 million BPD -- during September, and an uptick in crude stocks.
 

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On December 1, the Obama administration officially reversed its March proposal to open portions of the Atlantic and Pacific coastlines, and the eastern Gulf of Mexico to oil exploration. Instead, the administration said it will not propose such exploration for at least seven years. “The changes that we are making today really are based on the lessons that we have been learning” since the April 20 explosion that killed 11 workers on the Deepwater Horizon rig, Interior Secretary Ken Salazar said in a teleconference with reporters about the decision. The Interior Department’s 2012-2017 offshore drilling lease strategy will proceed “safely and responsibly” with offshore drilling “in the right ways and the right places,” he added.

Salazar also announced that the next lease sales in the western and central Gulf of Mexico -- where drilling is currently allowed under law -- will occur in late 2011 and 2012 after the department finishes its environmental review. He also emphasized that only an estimated one third of leases available to drilling companies in the Gulf are currently being used by those companies.

Interior’s announcement quickly won praise from some anti-drilling advocates. “The White House obviously learned lessons from the BP oil disaster," Rep. Kathy Castor (D-Fla.) said in a statement. "Drilling for oil off of Florida’s coast poses a threat to Florida’s economy, jobs and environment. Our small businesses and hotel owners are still suffering from the devastation left behind by the BP blowout."

However, Rep. Doc Hastings (R-Wash.) -- who is expected to chair the House Natural Resources Committee next Congress -- said the decision is “short-sighted and will lead to long-term job impacts, economic harm and increased reliance on foreign energy from dangerous and hostile countries.” The solution, he said, “is to find out what went wrong and make effective, timely reforms to ensure that U.S. offshore drilling is the safest in the world.”

One energy industry official said the reversal is not terribly surprising given that the West Coast was never in play and the eastern Gulf and Atlantic coastline were barely so. “This is just playing base politics,” the industry official said. “They’re just taking care of their ‘enviro’ base.”