October 2011 International Trade

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According to data compiled by the Netherlands Bureau for Economic Policy Analysis, world trade volume decreased by 1.0 percent in October from the previous month, following a revised decline of 1.1 percent in September. Whereas the figures for emerging economies are quite mixed, with Asia doing relatively well, advanced economies’ imports and exports declined substantially, particularly those of the Euro Area. In Japan, exports fell heavily, while imports surged. Prices fell 0.4 percent in October, but remained 25.3 percent above their February 2009 low.
 

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The U.S. goods and services deficit was $43.5 billion in October, down from $44.2 billion in September. Exports amounted to $179.2 billion and imports $222.6 billion.
 

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Paper exports increased by 9,000 tons (0.3 percent) in October, and imports shrank by 9,000 tons (2.1 percent). Exports remained 179,000 tons (5.9 percent) above year-earlier levels, but imports were 5,000 tons (1.2 percent) lower.
 

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Softwood lumber exports rose by 9 MMBF (6.8 percent) in October while imports advanced by 40 MMBF (4.9 percent). Exports were 28 MMBF (24.6 percent) higher than year-earlier levels, and imports were 90 MMBF (11.8 percent) higher.

3Q2011 Gross Domestic Product: Final Estimate

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The Bureau of Economic Analysis (BEA) estimated 3Q2011 growth in real U.S. gross domestic product (GDP) at a seasonally adjusted and annualized rate of 1.8 percent, down from the advance and preliminary estimates of, respectively, 2.5 and 2.0 percent but up from 1.3 percent in 2Q. Personal consumption expenditures (PCE), net exports (NetX) and private domestic investment (PDI) – mainly nonresidential fixed investment – contributed to 3Q growth in that order, while government consumption expenditures (GCE) exerted a small “drag.”
 

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Consumer Metrics Institute wrapped up its coverage of the GDP report with these comments:

-- A headline number of 1.81 percent is disappointing given that we are now six quarters into a "recovery," when numbers closer to 4 percent should be expected.

-- Federal fiscal spending continued to sustain the headline number, with defense spending contributing more than a quarter of a percent. Any successful efforts to restrain the deficit will have direct and immediate impact on these numbers.

-- The contracting per-capita disposable income explains the public's mood, even if consumers are seemingly "self-medicating" their psyches through increased (and perhaps ill-considered) holiday spending.

-- When compared to earlier data for the same quarter, this set of revisions again tells us that the BEA has been chronically misreading the economy with an optimistic bias (best exemplified by the massive downward revisions to the numbers for the "Great Recession" this past July). If the Federal Reserve continues to believe that it can and should "engineer" the economy for happier outcomes, we hope that their tinkering is informed by better and more timely data than that provided by the BEA.
 

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The GDP revision strengthens the recession call made by Federal Reserve analyst Jeremy Nalewaik. Nalewaik’s analysis correlated the onset of recessions with a fall in the year-over-year change in gross domestic product (GDP) below 2 percent. Since 1947, the U.S. economy either was already or soon would be in recession each time the year-over-year change in GDP fell below 2 percent (the red dashed line in the figure above). The year-over-year GDP change now stands at 1.46 percent in 3Q.

November 2011 U.S. Treasury Statement and Debt Overview

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The United States’ public debt stood at $14.790 trillion as of the end of September 2011, up from $14.025 trillion at the end of 2010 and more than double the level of a decade earlier. As can be seen from the charts above and below, nearly 89 percent of that debt was held by federal intra-governmental holding accounts (over half of which was comprised of the Federal Old-Age and Survivors Insurance Trust Fund, a.k.a., Social Security), and foreign and domestic investors of various types. The Federal Reserve held the remaining 10.8 percent. China, Japan and the United Kingdom were the three largest foreign holders of U.S. debt.
 

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The sea change in the distribution of U.S. public debt purchases among investor types that began in 1Q2011 continued in 3Q2011: Domestic private investors, and state and local governments remained on the sidelines. Also, foreign and international investors and intergovernmental holdings bought up only a small portion of the new debt. The lack of participation among the other investor classes left the Federal Reserve as “the last man standing” with its purchases of $649 billion (65 percent of the total incremental change).
 

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The fiscal picture has continued to worsen since September. Indeed, the red ink deepened again in November as outlays of $289.7 billion and receipts of $152.4 billion added another $137.3 billion to the federal budget deficit.
 

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U.S. treasury purchases by foreign investors picked up slightly, rising to $4.660 trillion in September but appear to have stalled (falling back to $4.656 trillion) in October. Four of the six largest holders sold some of their holdings; the rest of the world was a net seller. China remained the largest foreign creditor ($1.134 trillion) despite selling $14.2 billion of Treasury securities in October.
 

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The Federal Reserve has surpassed China in terms of U.S. Treasury holdings ($1.638 trillion). Interestingly, the Fed’s pace of purchases has slowed considerably in the past few months. Earlier this year it would have doubled its holdings had the pace of purchases been maintained for 12 months; that is no longer the case. Nonetheless, more recent data shows the Fed has continued to add U.S. Treasury debt since October, and held $1.673 trillion as of mid-December.
 

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Evidence of vacillating foreign interest in U.S. debt comes from the Treasury International Capital (TIC) accounting system. Flows swung from a net +$106.0 billion (inflows) in April to -$51.8 billion (outflows) in July and back to +$85.0 billion in August. The pendulum appeared to be swinging back to greater outflows in October, when outflows amounted to $48.8 billion. Essentially all of the outflows occurred in short-term securities (e.g., T-bills) and long-term private equities.
 

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We continue to monitor the contribution to GDP of each new dollar of total credit market debt. Although that contribution is again positive, we doubt the nearly 50-year trend of declining contributions has been permanently reversed.

November 2011 Consumer and Producer Price Indices

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The seasonally adjusted Consumer Price Index was unchanged in November. Over the last 12 months, the all items index increased 3.4 percent before seasonal adjustment.

The energy index declined for the second month in a row and offset increases in the indexes for food and all items less food and energy. As in October, the gasoline index fell sharply and the index for household energy declined as well. The index for all items less food and energy increased 0.2 percent, following increases of 0.1 percent in each of the prior two months.

The all items index has risen 3.4 percent over the last 12 months. This is a slightly smaller increase than last month's 3.5 percent figure, as the 12 month change in the energy index declined from 14.2 percent to 12.4 percent. In contrast, the 12 month change in the index for all items less food and energy continued to rise, reaching 2.2 percent in November.

The seasonally adjusted Producer Price Index for Finished Goods (PPI) advanced 0.3 percent in November. Finished goods prices fell 0.3 percent in October and moved up 0.8 percent in September. At the earlier stages of processing, the index for intermediate goods rose 0.2 percent and crude goods prices increased 3.8 percent. On an unadjusted basis, the finished goods index advanced 5.7 percent for the 12 months ended November 2011, the smallest year-over-year rise since a 5.6 percent increase in March 2011.
 

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Details at different stages of processing include:

Finished goods -- In November, the increase in the finished goods index was broad based with prices for finished consumer foods moving up 1.0 percent. The indexes for both finished goods less foods and energy and for finished energy goods inched up 0.1 percent.

Intermediate goods -- This index moved up 0.2 percent after declining 1.1 percent in October. Leading this increase, prices for intermediate energy goods rose 1.9 percent. The index for intermediate foods and feeds also contributed to the advance, moving up 0.6 percent. By contrast, prices for intermediate materials less foods and energy decreased 0.4 percent. For the 12 months ending in November, the intermediate goods index increased 7.7 percent, the smallest year-over-year rise since a 6.2 percent increase in January 2011.

Crude goods -- The index for crude goods moved up 3.8 percent. For the three months ending in November, prices for crude materials advanced 4.0 percent following a 1.5 percent decline from May to August. In November, the monthly increase in the crude goods index is mostly attributable to prices for crude energy materials, which jumped 10.5 percent. Also contributing to the November climb was the index for crude foodstuffs and feedstuffs, which advanced 0.5 percent. By contrast, prices for crude nonfood materials less energy decreased 2.5 percent.
 

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Half of the individual price indices we track were unchanged relative to October, while the other half declined. All were higher in November than a year earlier; however, only one (softwood logs, bolts & timber) rose more quickly on a year-over-year basis than in October.
 

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November 2011 Industrial Production, Capacity Utilization and Capacity

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Industrial production decreased 0.2 percent in November after having advanced 0.7 percent in October. Factory output moved down 0.4 percent in November; excluding a drop of 3.4 percent in the output of motor vehicles and parts, manufacturing production declined 0.2 percent. Mining production edged up 0.1 percent, while the output of utilities rose 0.2 percent. At 94.8 percent of its 2007 average, total industrial production for November was 3.7 percent above its year-earlier level. Wood Products output decreased by 0.4 percent but Paper output rose by 1.1 percent.
 

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Capacity utilization for total industry decreased by 0.3 percent (to 77.8 percent) in November, a rate 2.6 percent above its level from a year earlier and 2.6 percentage points below its long-run (1972--2010) average. Wood Products and Paper capacity utilization was split: respectively, -0.5 and 1.2 percent.
 

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Capacity at the all-industries and manufacturing levels crept higher (0.1 percent); Wood Products dropped by 0.2 percent while Paper declined by 0.1 percent.

December 2011 Macro Pulse -- Economy of Christmas Past, Present or Yet to Come?

In Charles Dickens’ A Christmas Carol, Ebenezer Scrooge is visited in turn by the Ghosts of Christmas Past, Present and Yet to Come. The first spirit takes Scrooge to scenes of his boyhood and youth. The second takes him to the markets, where people are buying gifts and the makings of Christmas dinner. The last takes him to scenes of desolation, misery and death.

From watching news coverage of Black Friday, one could have been forgiven for concluding the Ghost of Christmas Present had enticed consumers to spend as they did before the recession. "Sales rose...to a record $11.4 billion on Black Friday,” Ed Marcheselli, chief marketing officer at ShopperTrak, told CNBC. Such stories raised expectations for a blow-out November retail sales report. The Census Bureau played the Ghost of Christmas Yet to Come, however, in reporting that retail sales in November (including Thanksgiving) came in at +0.2 percent, on expectations of 0.6 percent, and down from a revised 0.6 percent in October. Retail sales less autos rose 0.2 percent, half of the expected 0.4 percent, while sales without autos and gasoline also “missed big” at just +0.2 percent.

Other recent developments include…. Click here to read the entire December 2011 Macro Pulse recap.

The Macro Pulse blog is a commentary about recent economic developments affecting 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 2011 Personal Income and Outlays, Retail Sales and Consumer Debt

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Bureau of Economic Analysis data showed that personal income increased $48.1 billion (0.4 percent) and disposable personal income (DPI) increased $30.2 billion (0.3 percent) in October. Personal consumption expenditures (PCE) increased $8.2 billion (0.1 percent). Real (inflation-adjusted) DPI increased 0.3 percent while real PCE rose by 0.1 percent.
 

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With DPI increasing faster than PCE, the personal saving rate rose to 3.5 percent, well off the recent peak of 5.0 percent seen in June. Despite the October increase, the three-month average saving rate pictured above dropped to 3.6 percent.
 

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Consumers ramped up spending on retail goods in October, by 0.5 percent. The “other” category saw the biggest jump ($1.7 billion or 0.6 percent), driven largely – according to Goldman Sachs – by the introduction of Apple’s latest iPhone.
 

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Total consumer debt outstanding increased in October, rising by a seasonally adjusted and annualized rate of 3.7 percent. The increase was broad-based; only commercial banks and finance companies saw a decline.

October 2011 Manufacturers’ Shipments, Inventories and New Orders

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According to the U.S. Census Bureau, the value of shipments and inventories were mostly higher in October for the sectors and industries we track, while new orders fell.
 

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Shipments increased for a fifth month, by $2.6 billion (0.6 percent) to $455.4 billion. Durable goods shipments increased $3.2 billion (1.6 percent) to $203.9 billion, led by transportation equipment. Shipments of nondurable goods decreased $0.7 billion (0.3 percent) to $251.5 billion following four consecutive monthly increases. Petroleum and coal products led the decrease. Wood and Paper shipments both rose -- by 1.6 and 0.4 percent, respectively.
 

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Data from the Association of American Railroads (AAR) and the Ceridian-UCLA Pulse of Commerce Index (PCI) help round out the picture on goods shipments. AAR reported a 1.7 percent increase in not-seasonally adjusted rail shipments in October (relative to September), and a comparable rise from a year earlier. Seasonal adjustments trimmed the 1.7 percent September-to-October increase to a 0.5 percent gain, however. Interestingly, rail shipments of forest products fell in October.

The PCI, which tracks diesel use for over-the-highway trucking, rose 1.1 percent on a seasonally and workday adjusted basis in October after three consecutive months of negative numbers. Ed Leamer, PCI chief economist said, “The October data offer some welcome relief from the double-dip fears that were rampant a month ago, but one month does not mean a new trend. Until we get a series of positive months, it remains a she-loves-me, she-loves-me-not economy with bad news followed by good followed by bad.”
 

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Inventories, up 24 of the last 25 months, increased $5.6 billion (0.9 percent) to $607.1 billion -- once again the highest level since the series was first published on a NAICS basis in 1992. The inventories-to-shipments ratio was 1.33, unchanged from September.

Durable goods inventories increased $1.6 billion (0.4 percent) to $366.9 billion, led by transportation equipment. Inventories of nondurable goods increased $3.9 billion (1.7 percent) to $240.2 billion; petroleum and coal products led the increase. Forest products inventories also rose, by 0.7 percent (Wood) and 0.1 percent (Paper).
 

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New orders, down two consecutive months, decreased $1.6 billion (0.4 percent) to $450.0 billion in October. Excluding transportation, new orders increased 0.2 percent.

Durable goods orders decreased $0.9 billion (0.5 percent) to $198.5 billion, led by transportation equipment; new orders for nondurable goods decreased $0.7 billion (0.3 percent) to $251.5 billion.

November 2011 ISM Reports

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The pace of growth in manufacturing picked up slightly in November, with the Institute for Supply Management’s (ISM) PMI rising to 52.7 percent, from 50.8 in October (50 percent is the breakpoint between contraction and expansion). After reciting some report details, Bradley Holcomb, chair of ISM’s Manufacturing Business Survey Committee, wrapped up his comments by saying, “Respondents cite continuing concerns about the general economic environment, government regulations and European financial conditions, but are cautiously more optimistic about the next few months based on lower raw materials pricing and favorable levels of new orders."
 

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The non-manufacturing sector grew at a marginally slower pace in November, reflected by a 0.9 percentage point drop (to 52.0 percent) in the non-manufacturing index (now known simply as the “NMI”). This is the lowest reading since January 2010, when the index registered 50.7 percent. "Respondents' comments for the most part project continued slow, incremental growth. There still remains a strong concern about lagging employment,” concluded Anthony Nieves, chair of ISM’s Non-Manufacturing Business Survey Committee.
 

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Expanding new orders and employment, and higher production helped lift overall activity for Wood Products in November. Paper Products also expanded, the main foreward-looking “negatives” being declines in orders and a rise in inventories.

Construction and Ag & Forestry both reported contraction in overall activity, while Real Estate expanded.

As the bar chart and table above indicate, input price behavior was mixed during November: prices fell more slowly for manufacturing but rose more quickly for the service sector.

Paper and paper products were the only relevant commodities up in price during November; cardboard products were down in price. Some respondents reported paying more for fuel while others paid less. No relevant commodity was described as being in short supply.

October 2011 U.S. Construction

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Overall construction spending in the United States increased by 0.8 percent during October, to a seasonally adjusted and annualized rate (SAAR) of $798.5 billion. All categories except public construction posted increases; the private residential category exhibited the largest advance in both absolute and percentage terms.
 

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Total housing starts fell by 0.3 percent in October, to 628,000 units (SAAR), but were up 16.5 percent over year-earlier levels. Single-family starts rose by 3.9 percent, to 430,000 units in October; interestingly, single-family starts are 0.9 percent lower than a year ago.
 

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New-home sales also advanced in October, by 1.3 percent to 307,000 (SAAR). The median price of new homes sold dropped by 0.5 percent, however, to $212,300. Although single-unit starts rose more quickly than sales (respectively, 16,000 versus 4,000), the three-month average starts-to-sales ratio ticked down to 1.4.
 

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Single-unit completions jumped by 7.1 percent, but the inventory of new single-family homes remained unchanged in absolute terms while months of inventory shrank by 0.1 month. Inventory stood at 162,000 units and 6.1 months. Once again, the number of new homes for sale was its lowest since such records began in January 1963.
 

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Existing home sales fared a little better than their new-home counterparts in October, rising by 70,000 units (SAAR) or 1.4 percent. The share of total sales comprised of new homes remained stable at 5.8 percent.
 

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With the median price of existing homes sold falling by $3,800 (2.3 percent), to $161,600, housing affordability jumped to a new record high in October. This followed on the heels of slight decreases in the not seasonally adjusted 10- and 20-city S&P/Case-Shiller home price indices during September (both roughly -0.5 percent).

“Home prices drifted lower in September and the third quarter,” said David Blitzer, chair of the Index Committee at S&P Indices. “The National Index was down 3.9 percent versus the third quarter of 2010 and up only 0.1 percent from the previous quarter. Three cities posted new index lows in September 2011: Atlanta, Las Vegas and Phoenix. Seventeen of the 20 cities and both Composites were down for the month. Over the last year home prices in most cities drifted lower. The plunging collapse of prices seen in 2007-2009 seems to be behind us. Any chance for a sustained recovery will probably need a stronger economy.
 

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“Detroit and Washington DC posted positive annual rates of change and also saw an improvement in these rates compared to August. Only New York, Portland and Washington DC posted positive monthly returns versus August. It is a bit disturbing that we saw three cities post new crisis lows. For the prior three or four months, only Las Vegas was weakening each month. Now Atlanta and Phoenix have fallen to new lows too. On a monthly basis, Atlanta actually posted a record low rate of -5.9 percent in September over August. The markets are fairly thin, and the relative lack of closed transactions might be exacerbating the downside. The relative good news is that 14 cities saw improvements in their annual rates of change, versus the six that weakened.”
 

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November 2011 Employment Report

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According to the Bureau of Labor Statistics (BLS) non-farm payroll employment rose by 120,000 in November, and the unemployment rate dropped to 8.6 percent; the drop in the unemployment rate resulted primarily from 315,000 people giving up looking for work, however. Employment in the private sector was stronger (+140,000), especially in retail trade, leisure and hospitality, professional and business services, and health care. Government employment continued to trend down (-20,000), especially at the local level. The change in total non-farm payroll employment for September was revised from +158,000 to +210,000, and the change for October was revised from +80,000 to +100,000.
 

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There were several less-encouraging aspects to the report besides the number of people who had given up looking for work. For one, as we have been pointing out for quite some time, employment is converging with the previous peak at a slower pace than any prior recession going back to 1973.
 

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Also, the number of persons not in the labor force reached a new high of nearly 87 million. In addition, the ratio of employed persons relative to the total population (EPR) has barely budged off its February 2010 low; the EPR is at levels comparable to those seen in the late 1980s.
 

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The civilian labor force participation rate fell back to 64.0 percent, while the annual percentage increase in average hourly earnings of production and non-supervisory employees ticked higher to nearly 1.6 percent, barely above the historical low set back in February 2004. With the consumer price index for urban consumers rising at a 3.9 percent annual pace, wages are falling in real terms (i.e., wage increases are not keeping up with price inflation).
 

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On a somewhat brighter note, part-time employment fell by 378,000 jobs while full-time employment increased by a somewhat comparable 323,000. The trend for part-time employment appears to be stable to declining slightly; the full-time trend is solidly, although modestly, higher if viewed from January 2010.

In summary, then, although this employment report was not awful, neither does it portend strong economic growth.