1Q2011 Gross Domestic Product: Second Estimate

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The Bureau of Economic Analysis (BEA) left its estimate of 1Q2011 growth in real U.S. gross domestic product (GDP) at a seasonally adjusted and annualized rate of 1.8 percent -- well below expectations of a revision to 2.2 percent. 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.” Comparing the advance and preliminary estimates shows that PCE contributed less to growth than first thought, while PDI contributed more. Without the upward revision in private inventories (now pegged at 1.2 percent, considerably higher than the advance estimate of 0.1 percent), 1Q growth would have been below 1 percent.
 

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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; the deflator removes the influence of price changes from the growth estimate.

“The importance of the price deflator used by the BEA cannot be overstated. In calculating the "real" GDP the BEA continued to use an overall 1.9 percent annualized inflation rate, which is substantially lower than the inflation rates being reported by any of the BEA's sister agencies. The mathematical implications of the deflator are simple: a lower deflator creates a higher "real" GDP reading. If April's CPI-U (as reported by the Bureau of Labor Statistics) of 3.2 percent year-over-year inflation is used as the deflator, the reported 1.84 percent annualized growth rate shrinks to a 0.56 percent annualized rate, and the "real final sales of domestic products" is actually contracting at a 0.63 percent rate. If instead of the year-over-year CPI-U we were to use the annualized CPI-U from just the first quarter (5.7 percent), the "real" GDP would be shrinking at a 1.82 percent annualized rate, and the "real final sales of domestic products" would be contracting at a recession-like 3.01 percent.

“Although the overall reported headline rate for the GDP remained essentially unchanged, the numbers reflected somewhat weaker consumer contributions and anemic "real final sales" -- all while using a price deflator that strains [credulity]….”

March 2011 International Trade

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According to data compiled by the Netherlands Bureau for Economic Policy Analysis, world trade volume increased by 1.4 percent in March from the previous month, following an upwardly revised rise of 0.4 percent in February. Trade growth varied widely by region in March. Both exports and imports grew strongly in the United States, reversing the contraction of both that occurred in February. Growth accelerated significantly in emerging Asia as well. By contrast, the natural disaster that struck Japan in March caused its exports to collapse, while imports declined as well. Euro Area exports continued to expand at a modest pace, while its imports decreased.

Prices jumped nearly 2.0 percent between February and March, and are now up 22.7 percent from their February 2009 low.
 

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The U.S. goods and services deficit widened to $48.2 billion in March (from $45.4 billion in February), the largest deficit since June 2010. Exports totaled $172.7 billion (up from $165.0 billion in February, and the largest absolute monthly rate of growth since 2000), while imports totaled $220.8 billion. Higher oil prices were responsible for most of the jump in imports.
 

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Paper exports and imports both increased in March: exports by 439,000 metric tons (15.7 percent) and imports by 47,000 tons (13.1 percent). Both metrics remained above year-earlier levels as well: exports +477,000 tons (17.3 percent) and imports +46,000 tons (12.7 percent).
 

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Softwood lumber exports rose by 12 MMBF (8.6 percent) in March, but imports jumped by 170 MMBF (25.6 percent). Exports were 34 MMBF (30.4 percent) higher than year-earlier levels, but imports 23 MMBF (2.6 percent) lower.

April 2011 U.S. Treasury Statement and Debt Overview

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Outlays of $330.0 billion and receipts of $289.5 billion added another $40.5 billion to the federal budget deficit in April, a month that typically sees revenue exceeding outlays. The U.S. federal debt held by the public stood at $14.288 trillion at the end of April.
 

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Foreigners held $4.479 trillion, or a little less than one-third of the U.S. public debt at the end of March 2011. China remained the largest foreign creditor ($1.144 trillion) despite selling $9.2 billion of Treasury securities, its fifth straight month as a net seller. The United Kingdom was the biggest buyer in both absolute ($29.7 billion) and percentage change (10.1 percent) terms. Taiwan replaced the Caribbean Banks as the fifth largest foreign holder of U.S. debt. Interestingly, holdings by the “other” (aggregated) category have been trending lower since last November, dropping $53 billion over that time period.
 

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The Federal Reserve put more distance between itself and both China and Japan during March in terms of U.S. Treasury holdings. Moreover, were the Fed to maintain its March rate of Treasury purchases for a year, it would more than double its current holdings. As mentioned above, China was a net seller in March, while Japan’s added to its holdings despite the March 11 earthquake and tsunami.

More recent data shows the Fed has ramped up purchases of U.S. Treasury debt since March, and held nearly $1.5 trillion as of mid-May.
 

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Flows into the United States for all types of investments were greater than outflows in March, as evidenced by the positive three-month-average net inflows shown by the Treasury International Capital (TIC) accounting system. Virtually all of the increase appears to have occurred in the “Change in Banks' Own Net Dollar-denominated Liabilities” category, however.
 

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Short-term U.S. securities (e.g., T-bills) continued to decline in March, although at a somewhat slower pace. With the exception of October, foreign investors have been net sellers of short-term U.S. debt during every month since September 2010.
 

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Net inflows into long-term public debt rose by $13.2 billion (to $36.275 billion) in March, but the three-month moving average declined because inflows dried up during February. Purchases of private securities also jumped by $14.91 billion in March, to $18.465 billion.

April 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 April on a seasonally adjusted basis. Over the last 12 months, the all items index increased 3.2 percent before seasonal adjustment.

The energy index posted another increase in April as the gasoline index continued to rise, the latter accounting for almost half of the seasonally adjusted all-items increase. The household energy index also rose, with all of its major components posting increases. The food index increased as well in April, though the 0.5 percent rise in the food at home index was the smallest increase this year.

The 12-month increases of major indexes continued climbing. The all items index rose 3.2 percent for the 12 months ending April 2011, the highest figure since October 2008. The energy index has now risen 19.0 percent over the last 12 months, with the gasoline index up 33.1 percent. The food index has risen 3.2 percent while the index for all items less food and energy has increased 1.3 percent; both figures represent increases over recent months.

The seasonally adjusted Producer Price Index for Finished Goods (PPI) rose 0.8 percent in April, seasonally adjusted. This advance followed increases of 0.7 percent in March and 1.6 percent in February. At the earlier stages of processing, prices received by manufacturers of intermediate goods climbed 1.3 percent in April, and the crude goods index rose 4.0 percent. On an unadjusted basis, prices for finished goods moved up 6.8 percent for the 12 months ended April 2011, the largest year-over-year gain since an 8.8-percent increase in September 2008.
 

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Details at different stages of processing include:

Finished goods -- About three quarters of the April advance in the finished goods index can be traced to a 2.5 percent jump in prices for finished energy goods. Also contributing to the rise in the finished goods index, prices for both finished goods other than foods and energy and for finished consumer foods moved up 0.3 percent in April.

Intermediate goods -- This index rose 1.3 percent in April, the ninth consecutive monthly advance. The broad-based April increase was led by prices for intermediate goods less foods and energy, which moved up 1.1 percent. The indexes for intermediate energy goods and for intermediate foods and feeds also contributed to the intermediate goods advance, rising 1.9 percent and 1.8 percent, respectively. For the 12 months ended April 2011, prices for intermediate goods climbed 9.4 percent, the largest increase since a 9.8 percent jump in October 2008.

Crude goods -- The crude-goods index increased 4.0 percent in April. For the three months ending in April, prices for crude materials moved up 7.0 percent following an 11.4 percent jump for the three months ending in January. Leading the broad-based monthly advance in April, the index for crude energy materials rose 4.8 percent. Prices for crude foodstuffs and feedstuffs and for crude nonfood materials less energy increased 4.0 percent and 2.6 percent, respectively.
 

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Price index changes for the forest products that we track were mixed in April. Lumber and wood products, and softwood lumber price indices fell; the price index for softwood logs, bolts and timber was unchanged. Year-over-year index changes were also mixed, with price levels either declining or else increasing at a slower pace.
 

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April 2011 Industrial Production, Capacity Utilization and Capacity

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Industrial production was unchanged in April after having increased 0.7 percent in March. Output in February is now estimated to have declined 0.3 percent; previously it was reported as having edged up 0.1 percent. In April, manufacturing production fell 0.4 percent after rising for nine consecutive months. Total motor vehicle assemblies dropped from an annual rate of 9.0 million units in March to 7.9 million units in April, mainly because of parts shortages resulting from the earthquake in Japan. Excluding motor vehicles and parts, factory production rose 0.2 percent in April. The output of Wood Products factories fell 0.4 percent, while Paper output decreased 0.6 percent. At 93.1 percent of its 2007 average, total industrial production was 5.0 percent above its year-earlier level.
 

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The rate of capacity utilization for total industry edged down 0.1 percentage point to 76.9 percent, a rate 3.5 percentage points below its average from 1972 to 2010. The falloff in manufacturing capacity utilization was an even more severe -0.5 percent. Wood Products downshifted by 0.2 percent, and Paper by 0.6 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.

May 2011 Macro Pulse -- “Transitory” or “Transition”?

“Transitory” seems to be the Federal Reserve’s newfound adjective for describing a spate of recent negative economic data. The Federal Open Market Committee’s March 15 meeting minutes stated the Committee anticipates that “the effects on inflation of the recent run-up in commodity prices [will] prove transitory.” Fed Vice Chair Janet Yellen, in an April 11 speech to the Economic Club of New York, invoked the term six times. Examples included: “recent increases in commodity prices are likely to have only transitory effects on headline inflation… the overall inflationary consequences of these pass-through effects to be modest and transitory… my expectation regarding the transitory effects of commodity price shocks on consumer inflation… fairly modest and transitory effects of an oil price shock….” Finally, in his April 27 press conference, Fed Chair Bernanke said that -- other than construction, “most of the slowdown in the first quarter [was] viewed by the Committee as being transitory.”

Click here to read the entire May 2011 Macro Pulse recap. Are the developments mentioned there “transitory” or indicative of an economy in “transition”?

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. 

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

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Bureau of Economic Analysis data showed that personal income increased $67.0 billion (0.5 percent), and disposable personal income (DPI) increased $64.4 billion (0.6 percent) in March. Personal consumption expenditures (PCE) increased $60.7 billion (0.6 percent), much of the rise went to higher priced food and fuel. Real DPI (DPI adjusted to remove price changes) increased 0.1 percent while real PCE increased 0.2 percent.
 

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Retail sales rose by 0.4 percent during March, the ninth straight month of increases. All categories advanced expect for motor vehicles sales, which declined by 1.5 percent.
 

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Total consumer debt outstanding increased for a sixth month in March, at seasonally adjusted and annualized rate of 3.0 percent. All of the increase was due to seasonal adjustments, as both the revolving and non-revolving categories shrank in not-seasonally adjusted terms. As we have seen before, the federal government was the debt holder with the largest increase in non-revolving debt (+$6.2 billion, not seasonally adjusted), which implies more individuals took out student loans in March. Financial institutions saw a small expansion in revolving credit.

April 2011 Employment Report

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Headline numbers from the April employment report were encouraging. That report showed the U.S. economy added 244,000 nonfarm jobs; even the 0.2 percentage point jump in the unemployment rate (to 9.0 percent) was heralded as good news because more people apparently looked for work in April. That job gain brought the change in nonfarm employment back nearly to 5 percent below the December 2007 peak.
 

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Those upbeat headlines were partially offset by somewhat less encouraging details. For example, the number of persons employed full time fell by 291,000 in April, while the number of persons employed part time for economic reasons rose by 167,000. This is not the outcome one would expect from an improving economy.

Nearly 6.5 million people were not counted as being in the labor force but would like a job now -- a jump of 232,000. Also, the total number of persons not considered part of the labor force rose to a new record above 86.2 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 hovered barely above 2 percent -- the slowest pace of growth since 2Q2004.

Although job gains were broader-based in April than in March, we can’t help but notice that 17 percent of the new private-sector jobs occurred in “Leisure & Hospitality.” In light of McDonald’s hiring of 62,000 workers in April, we suspect that many of those service jobs were part-time and low-paying positions.

March 2011 Manufacturers’ Shipments, Inventories and New Orders

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Shipments, inventories and new orders all posted gains at both the total manufacturing and individual industry levels during March according to the U.S. Census Bureau.
 

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Shipments, up seven consecutive months, increased $12.0 billion (2.7 percent) to $461.4 billion. Durable goods shipments increased $4.4 billion (2.1 percent) to $208.1 billion, led by transportation equipment. Shipments of nondurable goods increased $7.6 billion (3.1 percent) to $253.4 billion, thanks mainly to petroleum and coal products. Wood and Paper both rose, by 3.2 and 0.8 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 whopping 31.5 percent jump in not-seasonally adjusted rail shipments between February and March. Applying seasonal adjustments reduces that estimate to a more sedate (and realistic sounding) 2.0 percent. The PCI (which measures diesel consumption of highway trucking) also rose by a seasonally and workday adjusted 2.7 percent.
 

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Total inventories, up 14 of the last 15 months, increased $6.3 billion (1.1 percent) to $572.3 billion in March. The inventories-to-shipments ratio was 1.24, down from 1.26 in February. Durable goods inventories increased $4.5 billion (1.4 percent) to $334.3 billion, led again by transportation equipment. Inventories of nondurable goods increased $1.8 billion (0.8 percent) to $238.1 billion, mainly because of petroleum and coal products. Wood and Paper inventories also swelled, by 0.5 and 0.3 percent, respectively.
 

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New orders for manufactured goods rose for a fifth consecutive month in March, increasing $13.5 billion (3.0 percent) to $462.9 billion. Excluding transportation, new orders increased 2.6 percent. Durable goods orders increased $5.9 billion (2.9 percent) to $209.5 billion. Transportation equipment had the largest increase, $3.2 billion (6.2 percent) to $54.9 billion. Nondurable goods orders increased $7.6 billion (3.1 percent) to $253.4 billion.

March 2011 U.S. Construction

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Overall construction spending in the United States increased by 1.4 percent during March, to a seasonally adjusted and annualized rate (SAAR) of $768.9 billion. Private residential construction rose by the largest margin, gaining 2.6 percent; public construction was nearly flat, rising by only 0.1 percent.
 

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Residential construction improved somewhat, with total housing starts climbing by 7.2 percent -- to 549,000 units (SAAR) -- in March. Despite the jump, starts remained nearly 76 percent below the January 2006 peak of nearly 2.3 million.
 

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Most of the increase in starts occurred in the single-family component (30,000); multi-family starts rose by only 7,000 units.
 

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New-home sales also improved relative to February’s record-low pace, increasing by 11.1 percent to 300,000 (SAAR) in March. The median price of new homes sold bounced back slightly (by 2.9 percent) to $213,800.
 

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Because sales rose while completions fell, the inventory of new homes shrank in both months-of-inventory and absolute terms. Inventory stood at 183,000 units and 7.3 months (down from 8.2 months). Interestingly, that number of homes for sale was the lowest since August 1967.
 

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Existing home sales fared somewhat better than their new-home counterparts in March, rising by 180,000 units (SAAR), or 3.7 percent. New home sales ticked higher as a percentage of the total; the share of total sales comprised of new homes expanded to 5.1 percent (from 4.9 percent in February).
 

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With the median existing home price rising by $3,600 (2.2 percent), to $159,600 in March, housing affordability retreated noticeably but remained near the all-time high set in February.
 

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“There is very little, if any, good news about housing. Prices continue to weaken, trends in sales and construction are disappointing.” said David M. Blitzer, chair of the Index Committee at S&P Indices, when presenting the most recent S&P/Case-Shiller home price indices. “Ten of the 11 metropolitan service areas (MSAs) that recorded index lows in January fell further in February. The one exception, Detroit, is 30 percent below its 2000 price level. The 20-City Composite is within a hair’s breadth of a double dip. Fourteen MSAs and both Composites have continued to decline month-over-month for more than six consecutive months as of February.”
 

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April 2011 ISM Reports

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The pace of growth in manufacturing slowed again in April, with the Institute for Supply Management’s (ISM) PMI falling to 60.4, a drop of 0.8 percentage point. "The recent trend of rapid growth in the manufacturing sector continued in April as the PMI registered above 60 percent for the fourth consecutive month,” said Norbert Ore, chair of ISM’s Manufacturing Business Survey Committee. "The New Orders and Production Indexes continue to drive the PMI, as they have both exceeded 60 percent for five consecutive months. Manufacturing employment appears to have developed significant momentum, as the Employment Index readings for the first four months of 2011 are the highest readings in the last 38 years. Inventory growth also took place in April after two months of destocking; however, the inventory restocking would appear to be necessitated by the strong performance in new orders. While the manufacturing sector is definitely performing above most expectations so far in 2011, manufacturers are experiencing significant cost pressures from commodities and other inputs."

For a change, both Wood and Paper Products reported growth in April. Most noteworthy was Wood Products’ increases in orders (both new and backlogged), production and employment. Paper Products’ improvement was even broader, encompassing new export orders and the need to replenish inventories in addition to production and employment.
 

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The non-manufacturing sector grew at a much slower pace in April, reflected by a 4.5 percentage point (to 52.8 percent) drop in the non-manufacturing index (now known simply as the “NMI”). In fact, the service sector is now within 2.8 percentage points of contracting. All three service industries we track expanded, however.

The rate of input price changes diverged between the manufacturing and service sectors once again. The index of prices paid by manufacturers rose by 0.5 percentage point (i.e., prices rose at a faster pace in April), and now stands at its highest level since July 2008. At the same time, however, non-manufacturers saw a 2.0 percentage point decline (i.e., prices rose more slowly) in their index. The lists of commodities up in price were quite lengthy, and included fuel of all kinds and paper. No commodity was down in price, neither was any relevant commodity described as in short supply.

April 2011 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate crude oil jumped again in April, rising by $7.10 (6.9 percent) to $110.04 per barrel -- the highest level since April 2008. That rise occurred in part because of the effects of a slightly weaker dollar, but despite a drop in consumption of 252,000 barrels per day (BPD) -- to 18.9 million BPD -- during February along with a continued rise in crude stocks during April.
 

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ASPO-USA attributes the rising oil price to “the falling dollar, rapidly increasing gasoline prices, continued unrest in the Middle East, power shortages in China, and a very tight global supply/demand balance.” In their opinion, manipulation by speculators is minimal.

The announcement by the Saudis that they have cut oil production to 8.2 million BPD means OPEC production is settling back to the lowest level in recent years.