4Q2010 Gross Domestic Product: Second Estimate

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The Bureau of Economic Analysis (BEA) lowered its estimate of the 4Q2010 rate of growth in real U.S. gross domestic product (GDP). The U.S. economy expanded at a 2.8 percent annual rate -- down from the original estimate of 3.2 percent but up from 2.6 percent in 3Q. Personal consumption expenditures (PCE) and net exports (NetX) contributed to growth while private domestic investment (PDI) subtracted from it. Government consumption expenditures were more of a “drag” on growth than originally thought.
 

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The questions raised by last month’s report details remain: First, how could PCE expand if real gross domestic purchases (purchases by U.S. residents of goods and services wherever produced) decreased by 0.6 percent (previously estimated at -0.3 percent) and net exports rose?

Second, a supposed “sharp downturn” in imports contributed to GDP growth for the first time since 2Q2009. But did imports really fall? Not on a nominal basis, but apparently yes on a real basis. According to Census Bureau estimates, imports amounted to $594.3 billion during 3Q2010 and $598.9 billion during 4Q2010 (for a quarterly increase of $4.6 billion); exports were $460.3 billion in 3Q and $481.7 in 4Q (for a quarterly increase of $21.4 billion). Hence, the 3Q trade deficit was $134.0 billion and $117.2 billion in 4Q. Note that those are nominal, not inflation-adjusted, amounts. So, the trade deficit narrowed in 4Q. Apparently, then, the combination of a rise in exports and the 4Q swing in import prices (jumping by 4.4 percent after a 3Q drop of 2.1 percent) was sufficient to reduce the 4Q impact of imports to the point that net exports 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 looks less robust than it did last month; also the 4Q2010 GDP increase occurred primarily because of a combination of suspect consumer-fueled spending and statistical peculiarities, not because of a healthier and sustainable expansion to the means of production.

December 2010 International Trade

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According to data compiled by the Netherlands Bureau for Economic Policy Analysis, world trade volume jumped by 1.8 percent in December from the previous month, following a downwardly revised increase of 1.8 percent (originally 2.3 percent) in November. Trade growth in emerging economies outpaced that in advanced economies. Even though Japan’s export volume surged by 9.2 percent, export growth in emerging economies surpassed growth in advanced economies as a whole. On the import side, the difference was quite marked, with imports into emerging economies continuing to expand and imports into Japan and the Euro Area declining. Although trade volume increased in December, prices fell by 0.4 percent.

On a year-over-year basis, trade volume rose by an average of 15.2 percent during 2010. Growth was highest in emerging economies in Asia and Latin America. Import growth and export growth in the United States were close to the world average, while growth in the Euro Area lagged considerably. Year-over-year price changes averaged 5.6 percent during 2010.
 

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The U.S. goods and services deficit widened to $40.6 billion in December, from November’s $38.3 billion. Total December exports were $163.0 billion and imports were $203.5 billion. Import growth had been essentially flat since last June, while exports have trended higher by about $1.6 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 mid-2017 at the current rate of growth.

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U.S. paper exports contributed to the rise in overall exports; they jumped by 305,000 metric tons (10.6 percent) while imports fell by 29,000 tons (-6.5 percent). Both imports and exports remained above year-earlier levels.
 

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Softwood lumber exports settled lower by 7 MMBF (-5.6 percent) in December, while imports were essentially unchanged. As with paper, both lumber exports and imports remained above year-earlier levels.

January 2011 U.S. Treasury Statement and Debt Overview

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January outlays of $276.3 billion and receipts of $226.6 billion added another $49.8 billion to the federal budget deficit. The U.S. federal debt held by the public stood at $14.131 trillion at the end of January.
 

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Foreigners held $4.37 trillion, or a little less than one-third of the U.S. public debt at the end of December 2010. China remained the largest foreign creditor in December ($892 billion) despite selling $4.0 billion of Treasury securities. Great Britain, on the other hand, purchased $29.5 billion in December -- a 5.8 percent increase from November. Interestingly, the “other” (aggregated) category has been a net seller for the past couple of months, dropping $20 billion since October.
 

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Central banks control 64 percent of the foreign-held U.S. Treasuries, down from 72 percent a year earlier.
 

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The Federal Reserve overtook both China and Japan during November in terms of U.S. Treasury holdings, and it has been adding to its holdings since then. Furthermore, were the Fed to maintain its December rate of Treasury purchases for a year, it would more than double its current holdings. As mentioned above, China was a net seller in December, while Japan’s pace of purchases was comparatively slow.

More recent data shows the Fed has ramped up purchases of U.S. Treasury debt since December, and held nearly $1.2 trillion as of mid-February.
 

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Flows into the United States for all types of investments was greater than outflows in December, as evidenced by the positive three-month-average net inflows shown by the Treasury International Capital (TIC) accounting system. Although the rate of inflows rose in December the three-month average fell because of the influence of meager transfers during October.
 

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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 and the expectation that interest rates could soon begin to rise. Foreign investors were net sellers of short-term U.S. debt during every month since September -- with the exception of October -- hence why the three-month average went negative in November.
 

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Net inflows into long-term public debt retreated somewhat in December, but remained positive. Purchases of private securities have been relatively stable since September -- averaging $18.1 billion.

January 2011 Consumer and Producer Price Indices

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The seasonally adjusted Consumer Price Index for All Urban Consumers (CPI-U) increased 0.4 percent in January on a seasonally adjusted basis. Over the last 12 months, the all items index increased 1.6 percent.

Increases in indexes for energy commodities and for food accounted for over two-thirds of the all-items increase. The indexes for gasoline and fuel oil both increased in January, continuing their recent strong upward trend. The index for food at home posted its largest increase in over two years with all six major grocery store food group indexes rising.

The index for all items less food and energy also rose in January. The indexes for apparel, shelter, airline fares, and recreation all posted increases. In contrast, the indexes for new vehicles and for used cars and trucks declined in January. Over the last 12 months, the food index has risen 1.8 percent with the food at home index up 2.1 percent; both 12-month changes are the highest since 2009. The energy index has increased 7.3 percent over the last 12 months, with the gasoline index up 13.4 percent. The index for all items less food and energy has risen 1.0 percent.

The seasonally adjusted Producer Price Index for Finished Goods (PPI) rose 0.8 percent in January. This advance followed increases of 0.9 percent in December and 0.7 percent in November and marks the seventh straight rise in finished goods prices. At the earlier stages of processing, prices received by manufacturers of intermediate goods moved up 1.1 percent, and the crude goods index rose 3.3 percent. On an unadjusted basis, prices for finished goods advanced 3.6 percent for the 12 months ended January 2011.
 

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Details at different stages of processing include:

Finished goods -- Leading the broad-based increase in the index for finished goods were higher prices for finished energy goods, which rose 1.8 percent. The indexes for both finished goods less foods and energy and for finished consumer foods also contributed to this increase, moving up 0.5 percent and 0.3 percent, respectively.

Intermediate goods -- This index rose 1.1 percent, the sixth straight monthly increase. Accounting for nearly two-thirds of the broad-based January advance, prices for intermediate goods other than foods and energy climbed 1.0 percent. The indexes for intermediate energy goods and for intermediate foods and feeds also contributed to this rise, moving up 1.8 percent and 0.4 percent, respectively. For the 12 months ended January 2011, prices for intermediate goods increased 6.0 percent, the smallest advance since rising 5.4 percent in September 2010.

Crude goods -- The crude-goods index increased 3.3 percent. For the 3-month period ended in January, crude material prices climbed 11.5 percent after moving up 8.8 percent from July to October. In January, about half of the broad-based monthly advance is attributable to a 4.3-percent rise in prices for crude foodstuffs and feedstuffs. Also contributing to this increase, the index for crude nonfood materials less energy moved up 4.0 percent and prices for crude energy materials rose 1.9 percent.
 

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

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January 2011 Industrial Production, Capacity Utilization and Capacity

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Industrial production decreased 0.1 percent in January 2011 after having risen 1.2 percent in December. In the manufacturing sector, output increased 0.3 percent in January after an upwardly revised gain of 0.9 percent in December. Excluding motor vehicles and parts, factory production rose 0.1 percent in January. The output of utilities fell 1.6 percent in January, as temperatures moved closer to normal after unseasonably cold weather boosted the demand for heating in December; the output of utilities advanced 4.1 percent in that month. In January, the output of mines declined 0.7 percent. At 95.1 percent of its 2007 average, total industrial production in January was 5.2 percent above its level of a year earlier.
 

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The capacity utilization rate for total industry edged down to 76.1 percent, a rate 4.4 percentage points below its average from 1972 to 2010. The Wood Products utilization rate dropped by 1.0 percent while the rate for Paper ticked up by 0.1 percent.
 

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Capacity at the all-industries level crept higher (0.1 percent), but Wood Products fell 0.4 percent; Paper was essentially unchanged.

February 2011 Macro Pulse -- “Sixteen Tons”

Thanks to a lack of shocks in January, the U.S. economy managed to stay “on the tracks.” The 4Q2010 real GDP growth rate picked up to 3.2 percent (from 3Q’s 2.6 percent), but that growth appears to have been as much the result of unrealistically optimistic statistical assumptions as genuine activity. When the dust settled at the end of the month, we just felt (“borrowing” from the song that graces our title) “another month older and deeper in debt.”


Click here to read the entire February 2011 Macro Pulse recap.

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.

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

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Consumers appear to be forgetting some of the lessons learned during the past recession. Bureau of Economic Analysis data showed that disposable personal income (DPI) increased $47.3 billion (0.4 percent) in December. Personal consumption expenditures (PCE) increased $69.5 billion (0.7 percent). Real, inflation-adjusted DPI increased 0.1 percent while real PCE increased 0.4 percent. Whether in nominal or real terms, then, growth in spending outstripped that of incomes during December.
 

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Retail sales rose by 0.6 percent during December, the sixth straight month of increases. Motor vehicles posted the largest percentage gain (1.1 percent), while food service sales rose by a more sedate 0.2 percent.
 

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Total consumer debt outstanding increased for a third month in December, at an annual rate of 3.0 percent. Revolving credit (i.e., credit cards) increased at an annual rate of 3.5 percent -- the first monthly increase since July 2008, while nonrevolving credit increased at an annual rate of 2.8 percent. For once, the report details are consistent with the headline in that the credit increase appears to have been truly consumer driven. Specifically, finance companies were the largest source of change in credit (+$25.4 billion, not seasonally adjusted). During the previous several months, virtually all of the increase had been due to jumps in Federal Government debt.

January 2011 Employment Report

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The U.S. economy added a disappointing 36,000 nonfarm jobs in January, yet the unemployment rate fell by 0.4 percentage point to 9.0 percent. More positive elements from the employment report include an uptick (612,000) in the number of full-time employees, and a decline of 524,000 in the number of persons working part time for economic reasons.
 

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One should not put a great deal of confidence in this employment report because the Bureau of Labor Statistics (BLS) applied both population and employment benchmark adjustments to the data. Because those adjustments were not similarly applied to the December data, month-to-month changes are not all that meaningful. Edward Harrison discussed these adjustments and their implications in much greater detail. What is disturbing about the benchmark revision is that the BLS now estimates 215,000 fewer jobs were created in 2010 than originally estimated.
 

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As has happened frequently in the past, the unemployment rate dropped because of the statistical adjustments mentioned above, and because more people gave up looking for work and thus were no longer considered officially unemployed. I.e., the improvement occurred not because of a wholesale jump in hiring, but rather because so many people dropped out of the system. Obviously, this is not a healthy trend, especially for an economy supposedly in recovery.

Other discouraging aspects of the report include a civilian labor force participation rate of only 64.2 percent (a 27-year low), and a record-high 6.64 million people (a jump of 431,000 from December) who are not counted as being in the labor force, but would like a job now. Were that latter group included in the unemployment rate calculation, the rate would jump to nearly 13 percent.

January 2011 ISM Reports

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Manufacturing exhibited considerable strength in January, with the Institute for Supply Management’s (ISM) PMI jumping by 2.3 percentage points. "The manufacturing sector grew at a faster rate in January as the PMI registered 60.8 percent, which is its highest level since May 2004,” said Norbert Ore, chair of ISM’s Manufacturing Business Survey Committee. "The continuing strong performance is highlighted as January is also the sixth consecutive month of month-over-month growth in the sector. New orders and production continue to be strong, and employment rose above 60 percent for the first time since May 2004. Global demand is driving commodity prices higher, particularly for energy, metals and chemicals."

For once, both Wood and Paper Products showed signs of improvement. Wood Products saw increases in new orders, production and employment. Although new orders and production increased for Paper Products as well, employment decreased while inventories rose. Both industries faced rising imports, but that was partially offset (for Paper Products, at least) by greater order backlogs.
 

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The pace of growth of the non-manufacturing sector also picked up again in January, thanks to a 2.3 percentage point (to 59.4 percent) increase in its NMI/PMI. Once again, Real Estate and Construction both shared in that expansion while Ag & Forestry contracted.

The rate of input price increases is the aspect of both reports that is most troubling. The prices-paid index rose a comparatively modest 2.6 percentage points for non-manufacturers, but manufacturers faced a 9.0 percentage point jump in their price index. Gasoline, #1 and #2 diesel, and paper were among the relevant commodities up in price; no relevant commodity was down in price. Neither was any relevant commodity described as in short supply.

December 2010 Manufacturers’ Shipments, Inventories and New Orders

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

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Shipments, up four consecutive months, increased $8.4 billion (2.0 percent) to $436.0 billion. Durable goods shipments increased $3.2 billion (1.6 percent) to $200.8 billion, led by machinery. Petroleum and coal products helped pushed nondurable goods shipments up by $5.2 billion (2.3 percent) to $235.2 billion.

Solid wood shipments rose by 1.0 percent while Paper advanced 0.6 percent.
 

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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 substantial jump in rail shipments during December -- a not-entirely unexpected result since shipments typically rise between November and December. The PCI (which measures diesel consumption of highway trucking) reversed three previous months of declines and rose by 2.4 percent in December.
 

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Inventories, up 11 of the last 12 months, increased $5.8 billion (1.1 percent) to $550.4 billion. Durable goods inventories increased $2.2 billion (0.7 percent) to $322.1 billion, unchanged from the previously published increase. Increases in transportation equipment helped keep durable goods inventories elevated. Inventories of nondurable goods increased $3.6 billion (1.6 percent) to $228.2 billion, led by petroleum and coal products.

Wood and Paper inventories both ticked up in December, by 0.3 and 0.4 percent, respectively.
 

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New orders for manufactured goods, up five of the last six months, increased $0.7 billion (0.2 percent) to $426.8 billion in December. Durable goods orders declined for a third consecutive month, decreasing by $4.5 billion (2.3 percent) to $191.6 billion, primarily because of a falloff in transportation equipment. Meanwhile, orders for nondurable goods increased $5.2 billion (2.3 percent) to $235.2 billion. Excluding transportation, total new orders increased 1.7 percent.

December 2010 U.S. Construction

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Overall construction spending in the United States decreased by a seasonally adjusted and annualized rate (SAAR) of 2.5 percent during December, to $787.9 billion. Private residential construction took the biggest hit, falling 4.1 percent.
 

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Total housing starts fell 4.3 percent in December, to 529,000 units SAAR. For 2010 as a whole, builders began work on 586,000 units, the second fewest number of homes since the Census Bureau began keeping records; 2009 was the low point at 554,000.
 

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As we observed last month, there seems to be a “natural” or “background” rate of 500,000 total units, below which starts have fallen only twice during the past two years.
 

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Single-family starts essentially “flat-lined” around 440,000 after the federal homebuyer tax credit expired in April, while multi-family starts gradually eroded on a trend line basis.
 

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December’s 17.5 percent increase in new-home sales was one of the bright spots for the month. The falloff in starts and pickup in sales caused the ratio of starts to sales to extend its decline for a second month.
 

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Because sales rose much more dramatically than did completions, the inventory of new homes dropped in both absolute and months-of-inventory terms. Inventory stood at 190,000 units (down from 195,000 in November) and 6.9 months (down from 8.4 months).
 

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Existing home sales also rose in November -- particularly on a percentage basis, returning to levels comparable to early 2009. Nonetheless, the jump in new homes sales pushed that sector’s proportion of total sales up slightly.
 

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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) December housing affordability index remained near its all-time high set 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 Washington, D.C. and San Diego saw modest advances relative to October. Most metropolitan statistical areas (MSA) have seen prices erode on a year-over-year basis as well.
 

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“With these numbers more analysts will be calling for a double-dip in home prices,” said David Blizter, chair of the Index Committee at Standard & Poor's. “ Let’s take a moment to define a double-dip as seeing the 10- and 20-City Composites set new post-peak lows. The series are now only 4.8 percent and 3.3 percent above their April 2009 lows, suggesting that a double-dip could be confirmed before Spring.”
 

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January 2010 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate crude oil was virtually unchanged in January, rising by only $0.38 (0.4 percent) to $89.42 per barrel. That degree of stability likely occurred because of a slightly weaker dollar, and a modest rise in consumption of 135,000 barrels per day (BPD) -- to 19.1 million BPD -- during November that was offset by an equally modest January rise in crude stocks.
 

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ASPO-USA summed up the current oil price situation as follows:

“The [last week of January] started with oil prices continuing to fall until Friday morning when NY futures reached an eight-week low of nearly $85 a barrel largely on signals that the Saudis would be increasing production to slow price increases. Weaker U.S. economic data and a jump in U.S. crude inventories helped the decline. On Friday, however, the seriousness of the demonstrations taking place in Egypt and other Middle Eastern countries set in and oil prices surged $3.70 a barrel in NY to close at $89.73 on fears that the protests could spread to other oil-producing countries. In London Brent crude rose to a daily peak of $99.63 a barrel, the highest level since September 2008. Friday saw the biggest one-day jump in crude prices since September 2009.

“Although Egypt produces only 670,000 BPD, the Suez Canal and the accompanying Sumed pipeline moves some 2.9 million BPD of Middle Eastern crude and products to European and other destinations. So far there have been no indications that the demonstrations to unseat Egyptian President Mubarak have slowed oil production or transport in the region.

“During the week, the gap between NY oil prices, which at one point were approaching $85 a barrel, and London prices, which closed near $100, increased to an all-time high of more than $12 a barrel. The problem remains at the NY futures delivery depot in Cushing, Okla., where Canadian oil arriving by pipeline crowds out tank space supposedly set aside for delivery of oil from expiring NY futures contracts, thereby pushing down NY oil prices. In London futures settlements are in cash so there is no need to deliver actual oil. Most observers are now saying that the Brent benchmark represents the current value of oil and that NY prices are a temporary technical aberration.

“In NY wholesale gasoline prices rebounded from a 15 cent per gallon decline and are now only a few cents below the recent highs established two weeks ago.

“Leaving aside the dangers of much higher oil prices stemming from widespread political unrest in the Middle East, the global oil market remains tight. Saudi Oil Minister al-Naimi predicted that strong demand from China and India this year would lead to an increase in global oil consumption of as much as 1.8 million BPD this year exceeding IEA forecasts of a 1.41 million BPD increase. While al-Naimi predicted that prices would remain stable and suggested increases in Saudi output, others are not so sure. IEA Director Tanaka called the oil price situation ‘alarming.’

“Goldman-Sachs suggested last week that oil may be entering a .structural bull market. as spare capacity is brought into production to meet rising demand. A leading Saudi bank says that the kingdom will increase production from 8.2 to 8.4 million BPD this year.

“A Chinese trade group announced last week that Beijing’s oil refining may increase by 7.5 percent this year. The Saudis already have announced that they will increase crude shipments to China’s biggest refiner, Sinopec, by 10 percent in 2011.”

Regarding the deepwater drilling ban, ASPO-USA had this to say:

“The standoff between the U.S. government and those seeking to resume drilling in the Gulf of Mexico shows no sign of easing. Last week the Interior Department said it is still refusing to issue deepwater exploration permits because the drillers have not shown they have immediate access to and can deploy containment devices to deal with out-of-control wells.

“The American Petroleum Institute (API) released a study warning that continued delays in issuing permits would negatively impact deepwater drilling in the Gulf as well as jobs and the nation’s energy security.

“The study claims that nearly one-third of U.S. deepwater drilling projects could become uneconomical due to the increased costs attributable to the new regulations. The API claims that unless the policies are reversed, as much as 619,000 BPD of oil and gas production could be at risk by 2019 or 12 percent of current U.S. daily production.

“In the meantime the new majority in the U.S. House of Representatives has passed a bill rolling back the government’s budget to the fiscal 2008 level. This bill would deny funding for the additional inspectors that the administration has sought in the wake of the Deepwater Horizon oil spill.