1Q2011 Gross Domestic Product

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The Bureau of Economic Analysis (BEA) estimated 1Q2011 growth in real U.S. gross domestic product (GDP) at a 1.8 percent seasonally adjusted and annualized rate -- down noticeably from the previous quarter’s estimate of 3.1 percent. This revision leaves 4Q GDP growth higher than the 2.6 percent growth rate in 3Q. Personal consumption expenditures (PCE) and private domestic investment (PDI) contributed to growth while government consumption expenditures (GCE) subtracted from it. Net exports (NetX) were a “wash.”
 

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The Consumer Metrics Institute continues to question (legitimately, in our opinion) the reliability of the deflator used to arrive at the real GDP estimate: “Although the price indexes used for this quarter (representing an aggregate 1.9 percent annualized inflation rate) are higher than the credibility-stretching ones used for 4Q2010 (which representing an astonishingly low 0.4 percent annualized inflation rate), they are still significantly lower than the inflationary numbers published by the BEA's sister agencies. The Bureau of Labor Statistics (BLS) has most recently reported that the quarter ending year-over-year CPI-U rate for all items was 2.7 percent, even as the foreign trade price indexes showed year-over-year changes in excess of 9 percent. The importance of persistently low deflaters cannot be over emphasized: if the year-over-year CPI-U at the end of 1Q is used as an alternate deflater, real final sales actually contracted during the first quarter. Even more alarming: using the first quarter's average monthly CPI-U rates (a 5.75 percent annualized rate) would cause the entire GDP to be contracting at over a 2 percent rate.”

February 2011 International Trade

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According to data compiled by the Netherlands Bureau for Economic Policy Analysis, world trade volume increased 0.3 percent in February from the previous month, after an upwardly revised rise of 1.7 percent in January. World imports declined a bit, particularly in the United States, Japan and Asia. Export volumes increased slightly in most regions, the major exceptions being the United States and Latin America.

Prices jumped 1.6 percent between January and February, and are now up 20.4 percent from their February 2009 low.
 

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The U.S. goods and services deficit shrank to $45.8 billion in February, down from $47.0 billion in January. Exports totaled $165.1 billion and imports $210.9 billion.
 

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Paper exports and imports both shrank in February: exports by 228,000 metric tons (7.5 percent) and imports by 14,000 tons (3.8 percent). Both metrics remained above year-earlier levels, however: exports +180,000 tons (6.9 percent) and imports +12,000 tons (3.3 percent).
 

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Softwood lumber exports rose by 18 MMBF (15.4 percent) in February while imports fell by 34 MMBF (4.9 percent). Exports were 41 MMBF (44.3 percent) higher than year-earlier levels, but imports 73 MMBF (10.0 percent) lower.

March 2010 U.S. Treasury Statement and Debt Overview

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The United States’ public debt stood at $14.025 trillion as of the end of December 2010, more than double the level of a decade earlier. As can be seen from the charts above and below, a little over 90 percent of that calendar 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, a.k.a., Social Security), and foreign and domestic investors of various types. The Federal Reserve held the remaining 7.2 percent. China, Japan and the United Kingdom were the three largest foreign holders of U.S. debt.
 

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Interestingly, roughly three-fourths (76 percent) of the debt added during 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.
 

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The debt picture has continued to worsen since December. The total public debt outstanding grew to $14.270 trillion by the end of March 2011, a change of $245 billion 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 March as outlays of $339.0 billion and receipts of $150.9 billion added another $188.2 billion to the federal budget deficit.
 

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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 February ($1.154 trillion) despite selling $0.6 billion of Treasury securities. Great Britain, on the other hand, purchased $17.6 billion in February -- a 6.3 percent increase from January.
 

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The Federal Reserve has surpassed both China and Japan in terms of U.S. Treasury holdings ($1.213 trillion). Furthermore, were the Fed to maintain its February rate of Treasury purchases for a year, it would essentially double its current holdings. As mentioned above, China was a net seller in February, while Japan’s pace of purchases was comparatively slow. As mentioned above, the U.K.’s pace of purchases picked up in February, 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 February, and held $1.375 trillion as of mid-April.
 

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The rising three-month-average net inflows shown by the Treasury International Capital (TIC) accounting system indicate that more money flowed into the United States than flowed out in February. Net inflows jumped by $67 billion, raising the moving average to nearly $60 billion per month.

March 2011 Consumer and Producer Price Indices

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The seasonally adjusted Consumer Price Index for All Urban Consumers (CPI-U) increased 0.5 percent in March on a seasonally adjusted basis. Over the last 12 months, the all items index increased 2.7 percent before seasonal adjustment.

Gasoline and food prices continued to rise and together accounted for almost three quarters of the seasonally adjusted all-items increase in March. The gasoline index posted its ninth consecutive increase and has now risen 14.4 percent over the last three months. The household energy index rose as well, with advances in the fuel oil and electricity indexes more than offsetting a decline in the index for natural gas.

The seasonally adjusted Producer Price Index for Finished Goods (PPI) rose 0.7 percent in March, seasonally adjusted. This advance followed a 1.6-percent increase in February and a 0.8-percent gain in January. At the earlier stages of processing, prices received by manufacturers of intermediate goods climbed 1.5 percent in March and the crude goods index declined 0.5 percent. On an unadjusted basis, prices for finished goods moved up 5.8 percent for the 12 months ended March 2011, the largest year-over-year gain since a 5.9-percent advance in March 2010.
 

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Details at different stages of processing include:

Finished goods -- In March, nearly ninety percent of the increase in the finished goods index can be attributed to a 2.6-percent rise in prices for finished energy goods. Also contributing to the advance in the finished goods index, prices for goods other than foods and energy moved up 0.3 percent. By contrast, the index for finished consumer foods moved down 0.2 percent in March.

Intermediate goods -- This index moved up 1.5 percent in March, the eighth consecutive advance. The broad-based March increase was led by prices for intermediate energy goods, which rose 2.9 percent. The indexes for intermediate goods less foods and energy and for intermediate foods and feeds also were factors in the intermediate goods advance, moving up 0.9 percent and 2.2 percent, respectively. For the 12 months ended March 2011, prices for intermediate goods climbed 8.9 percent, the largest advance since rising 9.8 percent in October 2008.

Crude goods -- The crude-goods index fell 0.5 percent in March. For the 3 months ended in March, prices for crude materials advanced 6.2 percent, subsequent to a 13.0-percent jump for the 3 months ended December 2010. Leading the monthly decrease in March, the index for crude nonfood materials less energy fell 2.3 percent. Also contributing to this decline, prices for crude energy materials moved down 0.5 percent. By contrast, the index for crude foodstuffs and feedstuffs rose 0.3 percent in March.
 

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In the forest products sector, most indices (except pulpwood and softwood logs) we track moved higher in March. 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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March 2011 Industrial Production, Capacity Utilization and Capacity

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Industrial production increased 0.8 percent in March and rose at an annual rate of 6.0 percent for the first quarter as a whole. Manufacturing output advanced 0.7 percent in March, its fourth consecutive month of strong expansion; factory production climbed at an annual rate of 9.1 percent in the first quarter. At 93.6 percent of its 2007 average, total industrial production was 5.9 percent above its year-earlier level. Wood Products industrial production rose by 1.6 percent, while Paper increased by 1.9 percent.
 

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The rate of capacity utilization for total industry rose 0.7 percent to 77.4 percent, a rate 3.0 percentage points below its average from 1972 to 2010. Growth in manufacturing capacity utilization matched that of total industry. Wood Products increased by 1.9 percent, and Paper by 2.0 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 was unchanged.

April 2011 Macro Pulse -- The “Gulliver” Economy

Gulliver was a character in a Jonathan Swift novel who, when washed ashore after being shipwrecked, awoke on the beach only to discover that the island’s diminutive inhabitants, the Lilliputians, had tethered him to the ground. Gulliver is a fitting metaphor for the U.S. economy: it survived a “shipwreck” of a recession but numerous risk factors now constrain it from achieving full recovery and could tip it back into recession. Like the Lilliputians’ ropes that kept Gulliver prostrate in the sand, any one of those risk factors could hardly prevent the economy from rising to its feet; collectively, however, they prove a formidable restraint. Some of those risk factors include….


Click here to read the entire April 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.

February 2011 Personal Income and Outlays, Retail Sales and Consumer Debt

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Bureau of Economic Analysis data showed that personal income increased $38.1 billion (0.3 percent), and disposable personal income (DPI) increased $36.0 billion (also 0.3 percent) in February. Personal consumption expenditures (PCE) increased $69.1 billion (0.7 percent). Real (inflation adjusted) disposable income decreased 0.1 percent in February while real PCE increased 0.3 percent. On average, then, Americans spent all of their marginal increase in income.
 

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Retail sales rose by 1.0 percent during February, the eighth straight month of increases. Motor vehicles sales exhibited the largest percentage gain (2.3 percent), while food service sales turned higher after two months of declines.
 

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Total consumer debt outstanding increased for a fifth month in February, at seasonally adjusted and annualized rate of 3.8 percent. Once again, all of the credit expansion occurred in the “non-revolving” category, however, since revolving credit (i.e., credit cards) shrank at an annualized rate of 4.1 percent, while non-revolving credit increased at an annual rate of 7.7 percent. As we have seen before, the federal government was the debt holder with the largest increase in non-revolving debt (+$8.2 billion, not seasonally adjusted). That implies more individuals took out student loans in February.

February 2011 Manufacturers’ Shipments, Inventories and New Orders

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

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Total shipments, up six consecutive months, increased $1.4 billion (0.3 percent) to $448.3 billion. Transportation equipment had the largest increase ($0.7 billion, 1.4 percent, to $49.1 billion) among durable goods. Food products led the increase in non-durables, up $0.8 billion (1.3 percent) to $59.5 billion. Solid wood shipments fell by 0.7 percent, followed closely by Paper at -0.5 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 0.6 percent drop in not-seasonally adjusted rail shipments during February; only lumber and wood products jumped higher. Seasonally adjusting the AAR numbers makes the picture even gloomier, with U.S. rail carloads declining 3.0 percent. AAR blamed winter weather for the drop. The PCI (which measures diesel consumption of highway trucking) also fell by 1.5 percent. So, the Census Bureau shipment numbers appear to be contradicted by other data.
 

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Total inventories, up 13 of the last 14 months, increased $4.6 billion (0.8 percent) to $565.0 billion. The inventories-to-shipments ratio was 1.26, up from 1.25 in January.

Transportation equipment led the increase in durable goods inventories with a jump of $0.8 billion (1.0 percent) to $87.8 billion. Petroleum and coal products (up $0.8 billion, or 1.5 percent to $54.1 billion) led the increase in non-durable goods. Wood and Paper inventories both moved higher in February, by 1.2 and 0.2 percent, respectively.
 

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New orders, down following three consecutive monthly increases, fell $0.4 billion (0.1 percent) to $446.0 billion. Excluding transportation, new orders increased 0.1 percent.

Durable goods orders decreased $1.3 billion (0.6 percent) to $200.8 billion, pulled lower by transportation equipment (-$0.8 billion, or -1.5 percent, to $50.4 billion). Nondurable goods orders rose $0.8 billion (0.3 percent) to $245.2 billion.

March 2011 ISM Reports

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The pace of growth in manufacturing slowed slightly in March, with the Institute for Supply Management’s (ISM) PMI dropping by 0.2 percentage point. "The recent trend of rapid growth in the manufacturing sector continued in March, as the PMI registered above 60 percent for the third consecutive month,” said Norbert Ore, chair of ISM’s Manufacturing Business Survey Committee. "The component indexes of the PMI remain at very positive levels and signal strong sector performance in the first quarter. While manufacturers are benefiting from strength in new orders and production, there is significant concern with regard to commodity prices. Many manufacturers indicate the prices they have to pay for inputs are rising, and there is concern about the impact of higher prices on their margins."

Wood and Paper Products fell back into their usual patterns in March: Paper Products advanced and Wood Products retreated. The “positive” news for Wood Products (if it can be described as such) is that more categories showed no change than those that changed. About the only negative reading for Paper Products involved higher input prices.
 

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The non-manufacturing sector also grew at a slightly slower pace in March, thanks to a 2.4 percentage point (to 57.3 percent) drop in the non-manufacturing index (now known simply as the “NMI”). All three industries we track shared in that expansion, although the elements of growth in Ag & Forestry were rather scant.

The rate of input price changes diverged between the manufacturing and service sectors. The prices-paid index rose by 3.0 percentage points for manufacturers (i.e., prices rose at a faster pace in March) but non-manufacturers saw a 1.2 percentage point decline (i.e., prices rose more slowly) in their index. Fuel of all kinds and paper were more expensive. No relevant commodity was down in price, neither was any relevant commodity described as in short supply.

March 2011 Employment Report

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The U.S. economy added 216,000 nonfarm jobs in March, and the unemployment rate ticked down by another 0.1 percentage point to 8.8 percent (the lowest rate since April 2009).
 

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Those upbeat headlines were partially offset by somewhat less encouraging details. For example, the number of persons employed full time was essentially unchanged in March, while the number of persons employed part time for economic reasons nudged higher. This is not the outcome one would expect from an improving economy.

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Despite the upturn in employment, the chart above shows how much ground remains to be regained. That chart tells just part of the story, however, because returning to “zero” means only that the number of persons employed is equal to the peak of December 2007; it does not include the 150,000 persons of employable age added by population growth each month.

As has happened for the past several months, the unemployment rate dropped as much because of the number of people who 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. Here is a simple example of how the unemployment rate can improve as the number of persons not in the labor force rises: If there are 10 unemployed people out of a workforce of 100, the unemployment rate would be 10 percent. If one of those 10 unemployed people stops looking for work the BLS says there are nine unemployed people in a workforce of 99; the new unemployment rate would be 9.1 percent, an improvement from the original 10 percent. If population growth adds two new people to the workforce, and one of the two finds a newly created job, there are now 10 people unemployed in a workforce of 101; the unemployment rate becomes 9.9 percent – still better than the original 10 percent.

Nearly 6.3 million people were not counted as being in the labor force, but would like a job now. Also, the total number of persons not considered part of the labor force remained at a near-record 86.0 million.

Other discouraging aspects of the report included a civilian labor force participation rate that remained unchanged at 64.2 percent (a 27-year low) while the annual percentage increase in average hourly earnings of production and non-supervisory employees fell below 2 percent -- the slowest pace of growth since 2Q2004.

February 2011 U.S. Construction

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Overall construction spending in the United States decreased by a seasonally adjusted and annualized rate (SAAR) of 1.4 percent during February, to $760.6 billion. Private residential construction took the biggest hit, falling 3.7 percent; only the non-residential category gained ground, rising by 0.9 percent.
 

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Residential construction could only be described as “abysmal.” Total housing starts fell by 22.5 percent, to 479,000 units in February. That is the second-lowest level of activity since the Census Bureau began collecting housing data; only April 2009’s reading of 477,000 units was worse.
 

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The contraction in starts was nearly twice as severe in the multi-family component than the single-family component. Single-family starts fell by 50,000 (SAAR) while multi-family starts dropped by 89,000 units.
 

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New-home sales were equally disappointing, slumping by 16.9 percent to 250,000 (SAAR) in February -- the lowest pace on record. The median price of new homes sold dropped by 13.9 percent, to $202,100 -- the lowest nominal price since December 2003.
 

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Because sales fell while completions rose, the inventory of new homes rose in months-of-inventory terms even though the absolute number of available homes was essentially unchanged. Inventory stood at 186,000 units and 8.9 months (up from 7.4 months).
 

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Existing home sales fared somewhat better than their new-home counterparts in February, declining by a more modest 9.6 percent. That drop snapped three months of gains and was the largest percentage decline since July. New home sales continued to shrink as a percentage of the total; in February, the share of total sales comprised of new homes shrank to 4.9 percent.
 

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Although the median existing home price dropped by $1,500 in February, housing affordability remained nearly unchanged.
 

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Because seasonally adjusted S&P/Case-Shiller home price indices retreated in 12 of 20 metropolitan statistical areas (MSAs) during January, the 10- and 20-city indices also fell. Only Washington DC has seen prices rise on a year-over-year basis.

“Keeping with the trends set in late 2010, January brings us weakening home prices with no real hope in sight for the near future,” said David Blitzer, chair of the Index Committee at Standard & Poor's. “With this month’s data, we find the same 11 MSAs posting new recent index lows [on a seasonally unadjusted basis]. The 10-City and 20-City Composites continue to decline month-over-month and have posted monthly declines for six consecutive months now.

“These data confirm what we have seen with recent housing starts and sales reports. The housing market recession is not yet over, and none of the statistics are indicating any form of sustained recovery. At most, we have seen all statistics bounce along their troughs; at worst, the feared double-dip recession may be materializing. A few months ago we defined a double-dip for home prices as seeing the 10- and 20-City Composites set new post-peak lows. The 10-City Composite is still 2.8 percent above and the 20-City is 1.1 percent above their respective April 2009 lows, but both series have moved closer to a confirmed double-dip for six consecutive months. At this point we are not too far off, and that is what many analysts are seeing with sales, starts and inventory data too.”
 

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March 2011 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate crude oil shot higher in March, rising by $13.36 (14.9 percent) to $102.94 per barrel. That rise occurred in part because of the effects of a slightly weaker dollar, but despite a drop in consumption of 637,000 barrels per day (BPD) -- to 19.1 million BPD -- during January along with a continued rise in crude stocks during March.
 

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In fact, EconMatters analyst Dian Chu observed that storage tanks at Cushing, Oklahoma are nearing capacity, and imports have risen because there is nowhere else to go with the oil. Nonetheless, most commentators still say prices contain a $15 per barrel “fear premium” due to the Middle Eastern protests. Also, a few analysts are starting to talk about Brent crude moving up to $120-130 in the next quarter as summer demand gets ahead of OPEC’s ability to increase supplies.