4Q2010 Gross Domestic Product: First Estimate

Click image for larger version

The Bureau of Economic Analysis (BEA) reported that the rate of growth in real U.S. gross domestic product (GDP) accelerated slightly in 4Q2010 relative to 3Q. The U.S. economy expanded at a 3.2 percent annual rate, up from 2.6 percent in the previous quarter. Personal consumption expenditures (PCE) and net exports (NetX) contributed to growth while private domestic investment (PDI) subtracted from it. Government consumption expenditures were essentially a “wash.”
 

Click image for larger version

The report’s details raise some questions. First, how could PCE expand if real gross domestic purchases -- purchases by U.S. residents of goods and services wherever produced -- decreased by 0.3 percent and net exports rose?

Second, a supposed drop-off in imports contributed to GDP growth for the first time since 2Q2009. But did imports really fall? According to Census Bureau estimates, imports averaged $198.1 billion per month during 3Q2010 and $197.4 billion per month during the first two months of 4Q2010 for which data are available. Note that those are nominal, not inflation-adjusted, amounts. It would hardly seem that a $700 million-per-month decline in imports between 3Q and 4Q would boost GDP by the amount claimed. So, unless 4Q import prices rose substantially to amplify the nominal drop in imports, their contribution to GDP growth would certainly be suspect. As it turns out, though, import prices did in fact rise during 4Q, particularly for goods imports, and by a wide margin -- +21.8 percent on an annualized basis, from 3Q’s -9.2 percent. That 31 percentage point swing in goods import prices was enough to reduce the 4Q impact of imports to the point that they boosted GDP growth. Such are the vagaries of changes in percentages when computing statistics.

So, our takeaway of the GDP report is that economic activity increased during 4Q2010 on a combination of suspect consumer-fueled spending and statistical peculiarities, not because of a healthier and sustainable expansion to the means of production.

November 2010 International Trade

Click image for larger view

According to data compiled by the Netherlands Bureau for Economic Policy Analysis, world trade volume jumped by 2.3 percent in November from the previous month, following an upwardly revised increase of 1.0 percent (originally 0.5 percent) in October. The upsurge was due primarily to an acceleration of trade flows into and out of emerging economies. Emerging economies’ import volume went up by a “staggering” 5.1 percent. With the exception of Africa and the Middle East, all emerging regions contributed to the surge, import growth being highest in emerging Asia. The same pattern was mirrored on the export side: Emerging countries’ export volume grew 3.2 percent overall. Advanced economies’ healthy import growth of 1.0 percent was led by the Euro Area and Japan. In Japan a series of four monthly declines came to an end. U.S. imports continued to decline, while exports contracted in both the United States and Japan.

Although the trade volume increase was quite dramatic in November, price changes were less so. Prices ticked up by only 0.2 percent, but are almost 7.8 percent higher than in June 2010.
 

Click image for larger view

The U.S. goods and services deficit shrank to $38.3 billion in November, virtually unchanged from October’s $38.4 billion. Total November exports were $159.6 billion and imports were $198.0 billion. Import growth has been essentially flat since last June, while exports have trended higher by about $1.4 billion per month -- far slower than the rate needed to meet the White House goal of doubling January 2010’s exports by 2015. Doubling will not be achieved until early 2018 at the current rate of growth.
 

Click image for larger view

U.S. paper exports did not contribute to the rise in overall exports; they shrank by 119,000 metric tons (-4.0 percent) while imports rose by 49,000 tons (12.3 percent). Both imports and exports remained above year-earlier levels.
 

Click image for larger view

Softwood lumber exports rose by a meager 10 MMBF (8.8 percent) in November; imports fell by a greater margin in absolute terms (-14 MMBF, or 3.2 percent). As with paper, both lumber exports and imports remain above year-earlier levels.

December 2010 U.S. Treasury Statement and Debt Overview

Click image for larger version

The United States’ public debt stood at $13.562 trillion as of the end of September 2010, more than double the level of a decade earlier. As can be seen from the charts above and below, almost 90 percent of that fiscal year-end 2010 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), and foreign and domestic investors of various types. China, Japan and the United Kingdom were the three largest foreign holders of U.S. debt.
 

Click image for larger version

Click image for larger version

Interestingly, nearly all (92 percent) of the debt added during the first nine months of 2010 was underwritten by foreign and private domestic investors. Since Europe’s sovereign debt problems heightened during that timeframe, we suspect safe-haven buying of U.S. Treasuries was an important explanation for why those investor classes behaved as they did.
 

Click image for larger version

The debt picture has continued to worsen since September. The debt grew to $14.025 trillion by the end of December 2010, a change of nearly $0.5 trillion in just three months. Because the debt is growing, tax receipts since the beginning of FY2011 (i.e., October 1, 2010) obviously have not kept pace with budget outlays. Indeed, the red ink deepened again in December as outlays of $316.9 billion and receipts of $236.9 billion added another $80.0 billion to the federal budget deficit.
 

Click image for larger version

Foreigners have been stepping into the funding gap. The amount of U.S. public debt held by foreigners is homing in on $4.5 trillion. China remained the largest foreign creditor in November ($896 billion) despite selling $11.2 billion of Treasury securities. Great Britain, on the other hand, purchased $33.3 billion in November -- a 7 percent increase from October.
 

Click image for larger version

Central banks control nearly 65 percent of the foreign-held U.S. Treasuries, down from almost 75 percent a year earlier.
 

Click image for larger version

In November the Federal Reserve overtook both China and Japan in terms of U.S. Treasury holdings ($901 billion). Furthermore, were the Fed to maintain its November rate of Treasury purchases for a year, it would nearly double its current holdings. As mentioned above, China was a net seller in November, while Japan’s pace of purchases was comparatively slow. Like the Fed, the U.K.’s pace of purchases picked up in November, and would nearly double its holdings if maintained for another year.

More recent data shows the Fed has ramped up purchases of U.S. Treasury debt since November, and held nearly $1.1 trillion as of mid-January.
 

Click image for larger version

Even though foreign investors have been net buyers of Treasury debt, they could potentially be pulling funds out of other types of U.S. investment vehicles. Actually, that has not been the case since June 2010, as evidenced by the positive three-month-average net inflows shown by the Treasury International Capital (TIC) accounting system.
 

Click image for larger version

What is apparent, however, is that short-term U.S. securities (e.g., T-bills) seem to be losing their international appeal, perhaps in part because of the paltry yields associated with those investments. Foreign investors were net sellers of short-term U.S. debt in September and November, hence why the three-month average went negative in November.
 

Click image for larger version

Net inflows into long-term public debt nearly doubled (to $75.9 billion) in November, but the three-month average dropped anyway because of October’s weak inflows. Purchases of private securities have been relatively stable for the three months leading up to and including November -- averaging $18.5 billion.

December 2010 Consumer and Producer Price Indices

Click image for larger version

The seasonally adjusted Consumer Price Index for All Urban Consumers (CPI-U) increased 0.5 percent in December on a seasonally adjusted basis. Over the last 12 months, the all items index increased 1.5 percent.

The energy index increased in December. The gasoline index rose sharply and accounted for about 80 percent of the all items seasonally adjusted increase. The household energy index, which declined in November, increased as well. The food index increased slightly in December, with the fruits and vegetables index rising notably.

The index for all items less food and energy also rose in December. An increase in the shelter index accounted for about 60 percent of the rise, and the indexes for airline fares, medical care and apparel rose as well. These increases more than offset declines in the indexes for communication, recreation, and household furnishings and operations.

The seasonally adjusted Producer Price Index for Finished Goods (PPI) rose 1.1 percent in December, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. This advance followed increases of 0.8 percent in November and 0.4 percent in October and marks the sixth straight rise in finished goods prices. At the earlier stages of processing, prices received by manufacturers of intermediate goods moved up 1.0 percent, and the crude goods index increased 4.0 percent. On an unadjusted basis, prices for finished goods advanced 4.0 percent in 2010 after climbing 4.3 percent in 2009.
 

 Click image for larger version

Details at different stages of processing include:

Finished goods -- About three-fourths of the December rise in the finished goods index can be traced to prices for energy goods, which increased 3.7 percent. Also contributing to the broad-based advance in the finished goods index, prices for consumer foods and for goods other than foods and energy moved up 0.8 percent and 0.2 percent, respectively.

Intermediate goods -- This index moved up 1.0 percent in December, its fifth consecutive monthly advance. Accounting for about two-thirds of the broad-based December increase, prices for intermediate energy goods rose 3.1 percent. The indexes for both intermediate materials less foods and energy and for intermediate foods and feeds also contributed to this advance, rising 0.4 percent and 0.6 percent, respectively. In 2010, prices for intermediate goods climbed 6.5 percent after increasing 2.9 percent in 2009.

Crude goods -- The crude-goods index increased 4.0 percent in December. For the three months ended in December, crude goods prices advanced 9.0 percent. Accounting for about 70 percent of the December monthly increase, the index for crude energy materials climbed 7.7 percent. Also contributing to this broad-based advance, prices for crude nonfood materials less energy and for crude foodstuffs and feedstuffs moved up 3.1 percent and 1.1 percent, respectively.
 

Click image for larger version

In the case of forest products sector, the indices we track are either stable or moving higher. Except for pulpwood, prices are all higher than year-earlier levels although the rate of growth has slowed in several cases.
 

Click image for larger version

Click image for larger version

December 2010 Industrial Production, Capacity Utilization and Capacity

Click image for larger version

Industrial production increased 0.8 percent in December after having risen 0.3 percent in November. The rate of change for industrial production was revised down in November but revised up in September and October; the net effect of the revisions from July to November left the level of industrial production in November slightly higher than was previously reported. For the fourth quarter as a whole, industrial production increased at an annual rate of 2.4 percent, a slower pace than in the earlier quarters of the year. In the manufacturing sector, output moved up 0.4 percent in December with gains in both durables and nondurables. Excluding motor vehicles and parts, factory output increased 0.5 percent. The output of mines advanced 0.4 percent; the output of utilities surged 4.3 percent, as unusually cold weather boosted the demand for heating. At 94.9 percent of its 2007 average, total industrial production in December was 5.9 percent above its level of a year earlier. Industrial production among forest products manufacturers decreased by at least 0.5 percent in December.
 

Click image for larger version

Click image for larger version

December’s all-industry capacity utilization rate rose to 76.0 percent, a rate 4.6 percentage points below its average from 1972 to 2009. Forest products manufacturing capacity utilization rose 0.1 percent for Wood Products, but fell 0.5 percent for Paper.
 

Click image for larger version

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

January 2011 Macro Pulse -- Climbing Out of the Well

Because enough indicators have shown some improvement in the last few months, many analysts have concluded the U.S. economy has turned the corner and is on the mend. When these recent improvements are placed in context, however, perhaps a more apt analogy for the state of the economy would be that of someone who has fallen into a well, and -- with no one around to help -- must save himself by scaling the wet and slippery walls. Yes, perhaps the first few feet have been successfully negotiated, but one slip could send the economy hurtling back down the shaft. To be declaring victory while still effectively “at the bottom” seems to be rather premature and a denial of very credible obstacles and risks.

What obstacles and risks do we see? Click here to find out by reading the entire January 2011 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.

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

Click image for larger view

Bureau of Economic Analysis data showed that disposable personal income (DPI) increased $37.8 billion (0.3 percent) in November, while personal consumption expenditures (PCE) increased $43.3 billion (0.4 percent). Real (i.e., inflation-adjusted) disposable income increased 0.2 percent in November, the same increase as in October. Real PCE increased 0.3 percent in November, compared with an increase of 0.5 percent in October.
 

Click image for larger view

Click image for larger view

Retail sales rose by 0.8 percent during November, the fifth straight month of increases. The “Other” category posted the largest percentage gain (1.4 percent), while vehicle sales declined (0.8 percent).
 

Click image for larger view

Consumers appear to be taking on more debt. Total consumer debt outstanding increased for a third month in November, at an annual rate of 0.7 percent. Revolving credit (i.e., credit cards) decreased at an annual rate of 6.3 percent -- the 27th consecutive monthly decrease, while nonrevolving credit increased at an annual rate of 6.8 percent. Once again, however, the report details tells a different story. In fact, virtually all of the increase was due to an annualized $43.2 billion (not seasonally adjusted) jump in Federal Government debt. Without the federal “contribution,” consumer credit would have increased by only $6 billion.

December 2010 Employment Report

Click image for larger view

The U.S. economy added 103,000 nonfarm jobs in December, and the unemployment rate fell by 0.4 percentage point to 9.4 percent. Other positive elements from the employment report include an uptick (557,000) in the number of full-time employees, and a smaller decline (29,000) in the number of persons working part time for economic reasons.
 

Click image for larger view

Payrolls expanded by 1.11 million jobs (1.33 million in the private sector) during 2010, 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, so job creation ostensibly reached that milestone in December. Since nonfarm employment bottomed out last December, job creation has averaged about 92,500 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.
 

Click image for larger view

Although we do not want to dismiss good news if it is legitimate, we need to point out that much of the improvement in the December employment picture was the result of seasonal adjustments that “swamped” the original Bureau of Labor Statistics (BLS) estimates. Other disconcerting details from the report include another 0.2 percentage point drop in the civilian labor participation rate (to 64.3 percent, the lowest level since April 1984) and a stagnant employment-to-population ratio. Also, although the number of unemployed person decreased by 556,000 (the main reason why the unemployment rate fell), over 250,000 of that number involved people who gave up looking for work.

In the words of one analyst, “The U.S. unemployment picture [seems] unusually confusing these days.” Two conflicting reports added to that confusion on January 6: First, ADP reported an increase of 297,000 in private-sector employment (which, like the BLS estimates, may have been largely driven by seasonal adjustment). That was followed by a Gallup poll showing that both the unemployment rate and the number of part-time workers increased in December.

Dennis Jacobe, Gallup’s chief economist, attempted to explain the discrepancies as follows: “Because the Gallup unemployment measure is not seasonally adjusted, it tends to more accurately reflect what is actually taking place in the U.S. job market -- and may not agree with the government's estimate that is seasonally adjusted. Further, Gallup's data tend to be more up-to-date than the government's because Gallup polls on the unemployment situation continuously. Combined, seasonal adjustments and timing differences likely explain much of the disparity between Gallup's measures of underemployment and unemployment, compared with those reported by others.”

Regardless whose data may be the most accurate, all of the surveys agree that nearly one in five Americans continue to be unemployed or employed part-time looking for full-time work.

December 2010 ISM Reports

Click image for larger version

With a 0.4 percentage point increase (to 57.0 percent) in its PMI, manufacturing expanded at a slightly faster pace in December, according to the Institute for Supply Management (ISM). "The manufacturing sector continued its growth trend as indicated by this month's report. We saw significant recovery for much of the U.S. manufacturing sector in 2010,” said Norbert Ore, chair of ISM’s Manufacturing Business Survey Committee. "The recovery centered on strength in autos, metals, food, machinery, computers and electronics, while those industries tied primarily to housing continue to struggle. Additionally, manufacturers that export have benefitted from both global demand and the weaker dollar. December's strong readings in new orders and production, combined with positive comments from the panel, should create momentum as we go into the first quarter of 2011."

Wood Products reported no change again in December, while the only real bright spots for Paper Products involved rising employment, lower inventories and slowing imports.
 

Click image for larger version

The pace of growth of the non-manufacturing sector also picked up in December, thanks to a 2.1 percentage point (to 55.0 percent) increase in its NMI/PMI -- the strongest reading since May 2006. Real Estate and Construction both shared in that expansion while Ag & Forestry contracted.

There were two disturbing aspects of both reports: First, employment grew at a slower pace in both sectors. Second, input prices increased noticeably. Price indices rose 3.0 percentage points for manufacturers and 6.8 percent for service industries; service-industry costs are now at their highest level since September 2008. Fuel, transportation costs, paper and caustic soda were among the relevant commodities up in price; no relevant commodity were down in price. Coated groundwood was described as in short supply.

November 2010 Manufacturers’ Shipments, Inventories and New Orders

Click image for larger view

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

Click image for larger view

Shipments, up three consecutive months, increased $3.4 billion (0.8 percent) to $424.5 billion. Durable goods decreased $0.3 billion (0.1 percent), led by transportation equipment. However, nondurable goods -- especially petroleum and coal products -- offset that decline, increasing $3.7 billion (1.7 percent).

Solid wood shipments increased by 0.7 percent (to $6.4 billion), but paper declined by 0.5 percent (to $14.3 billion).
 

Click image for larger view

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 indicated a continued decline in rail shipments during November, although the rate of decline was slower than in October. The PCI (which measures diesel consumption of over-the-road trucking) rose by 0.4 percent, but that increase was insufficient to offset the decline of 0.6 percent in the previous month, and not nearly enough to offset the 2.1 percent drop in the PCI since July.
 

Click image for larger view

Inventories, up 10 of the last 11 months, increased $4.1 billion (0.8 percent) to $543.8 billion. Durable goods inventories increased $2.0 billion (0.6 percent), unchanged from October’s rate of increase; transportation equipment led the durables increase. Nondurable goods rose by $2.1 billion (0.9 percent), led by petroleum and coal products. Inventories of both Wood and Paper Products declined.
 

Click image for larger view

New orders for manufactured goods, up four of the last five months, increased $3.2 billion (0.7 percent) to $423.8 billion in November. Durable goods orders decreased $0.6 billion (0.3 percent), led by transportation equipment, while nondurable goods rose by $3.7 billion (1.7 percent).

December 2010 Monthly Average Crude Oil Price

Click image for larger view

The monthly average U.S.-dollar price of West Texas Intermediate crude oil jumped by $4.90 (5.8 percent) in December, to $89.04 per barrel. That price increase occurred despite a slightly stronger dollar, a noticeable drop in consumption of 568,000 barrels per day (BPD) -- to 18.9 million BPD -- during October, but coincided with an equally noticeable drop in crude stocks.
 

Click image for larger view

Click image for larger view

The Environmental Protection Agency (EPA) announced on December 23 that it will regulate greenhouse gas emissions from power plants and oil refineries in 2011. The move highlights the Obama administration's intent to press ahead with curbs on carbon despite congressional resistance, and comes as part of a legal settlement with several states, local governments and environmental groups that sued the Bush-era EPA for failing to cut those emissions.

Collectively, electric utilities and oil refineries account for almost 40 percent of U.S. greenhouse gas emissions: Power plants generate more than 2.3 billion tons of carbon dioxide emissions each year, more than any other industry; oil refineries emit more than 200 million tons of carbon dioxide annually.

Under the settlement, EPA will propose new performance standards for power plants in July 2011 and for refineries in December 2011. Final standards will be issued in May 2012 and November 2012, respectively.

The economic impact of these regulations will not be known until the procedural details are proposed; nonetheless, we think it is fairly safe to assume energy prices will rise as companies pass the added regulatory costs on to consumers.

November 2010 U.S. Construction

Click image for larger view

Click image for larger view

Overall construction spending in the United States increased by a seasonally adjusted and annualized rate of 0.4 percent during November, to $810.2 billion. The only category to experience a decline was private non-residential construction, which decreased by 0.1 percent.
 

Click image for larger view

Apparently, most of the private residential spending referenced above went into brand-new projects (as opposed to those that have been underway for several months), because the number of total housing starts rose while completions fell.
 

Click image for larger view

Total starts have been bumping along what we have dubbed the “background activity” level, averaging about 572,000 starts since January 2009. There seems to be a floor of 500,000 units, below which starts have fallen only twice during the past two years.
 

Click image for larger view

Click image for larger view

The pace of new-home sales picked up in November, rising 5.5 percent relative to October. Even so, the ratio of starts to sales continued to mount; since starts include all building activity regardless of motivation, whereas sales measure only those homes built on a “speculative” basis (i.e., not on contract initiated by the eventual occupant), the rising starts-to-sales ratio may imply that a sizeable proportion of homes coming “on line” are being built under contract.
 

Click image for larger view

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.
 

Click image for larger view

Existing home sales also rose in November, returning to levels comparable to early 2009. With the uptick in existing home sales, new homes continue to decline as a proportion of total sales.
 

Click image for larger view

Although existing home prices have been trending downward since July, 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 November. 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. Falling home prices are a two-edged sword: While they make housing purchases more affordable, in a perverse way they also discourage those purchases: Why buy a home if there is a high likelihood that continued price erosion will quickly wipe out whatever equity the buyer has in the home?

As if to drive home that point, the seasonally adjusted S&P/Case-Shiller home price indices retreated almost across the board in October. Only Denver and Washington, D.C. saw modest advances relative to September. Most metropolitan statistical areas (MSA) have seen prices erode on a year-over-year basis as well.
 

Click image for larger view

David Blizter, chair of the Index Committee at Standard & Poor's, was quite crestfallen during the most recent press conference. “The double-dip [in housing] is almost here, as six cities set new lows for the period since the 2006 peaks. There is no good news in October’s report. Home prices across the country continue to fall.” Blitzer said. “The trends we have seen over the past few months have not changed. The tax incentives are over and the national economy remained lackluster in October, the month covered by these data. Existing homes sales and housing starts have been reported for both October and November, and neither is giving any sense of optimism. On a year-over-year basis, sales are down more than 25 percent and the months’ supply of unsold homes is about 50 percent above where it was during the same months of last year. Housing starts are still hovering near 30-year lows. While delinquency rates might have seen some recent improvement, it is only on a relative basis. They are still well above their historic averages, in both the prime and sub-prime markets.”
 

Click image for larger view