2Q2011 Gross Domestic Product: Second Estimate

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The Bureau of Economic Analysis (BEA) estimated 2Q2011 growth in real U.S. gross domestic product (GDP) at a seasonally adjusted and annualized rate of 1.0 percent, down from the 1.3 percent rate previously estimated for 2Q, but up from a rate of 0.4 percent in 1Q2011. Private domestic investment (PDI) and personal consumption expenditures (PCE) contributed virtually all of the 2Q growth while government consumption expenditures (GCE) subtracted from it. Net exports (NetX) were a essentially a “wash.” PCE was bumped higher in the latest estimate, while NetX was nearly zeroed out by a higher value of imports.
 

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The Consumer Metrics Institute made this observation about the latest 2Q2011 GDP report:

“This new GDP news release again lowered the BEA's previously reported readings of economic growth rates, and now shows the two most recent consecutive quarters with growth rates below 1% [the actual number was 0.98%, which rounds up to 1.0%].

“-- The good news (relatively speaking) is that commercial fixed investment appears to be improving, although the reported growth rate (1.01% annualized) is still weak by the historic standards of an economy two years into a recovery.

“-- But the bad news is that consumer spending on goods continued to contract. Coupled with that contraction is the fact that inventories were being drawn down as factories dropped production levels even faster than consumption waned.

“-- The ‘deflator’ used to translate the nominal data into ‘real’ data continues to be lower than numbers provided by the BEA's sister agencies [Note: we covered this topic here], and it may be the entire source of the reported growth.

“The continued downward revisions in the data indicate that the BEA is still having difficulty reading this economy. Even though their most recent numbers tell a story of an economy that is admittedly far weaker than it should be if the U.S. was truly well into a ‘recovery,’ it is likely that their measurements of a dynamically changing economy still substantially lag what is really happening.

“Our real concern is that the BEA's track record of late has been one of initial optimism, followed a year later by quiet revisions downward towards a darker reality -- one far closer to what ‘Main Street’ America has been feeling all along. We wonder if this report is any different.”

June 2011 International Trade

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According to data compiled by the Netherlands Bureau for Economic Policy Analysis, world trade volume “plummeted” by 2.2 percent in June from the previous month, following an unrevised rise of 2.3 percent in May. Most major regions shared in the decline, the exceptions being Africa and the Middle East and Japan. In Japan, the recovery of exports from the March natural disaster gained speed. Japanese imports hardly grew, however. The Euro Area’s June performance was particularly poor, with both exports and imports contracting substantially.

Prices slipped 0.4 percent between May and June, but remained 26.6 percent above their February 2009 low.

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The U.S. goods and services deficit expanded by 4.5 percent (to $53.1 billion) in June, its widest gap since October 2008. Exports totaled $170.9 billion (down from $175.0 billion in May), while imports totaled $223.9 billion (down from $215.8 billion in May).
 

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Paper exports decreased by 14,000 tons (0.4 percent) in June, while imports rose by 3,000 tons (0.6 percent). Exports remained 432,000 tons (15.6 percent) above year-earlier levels, but imports were 11,000 tons (2.7 percent) lower.
 

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Softwood lumber exports fell by 9 MMBF (8.2 percent) in June while imports advanced by 17 MMBF (2.4 percent). Exports were 35 MMBF (31.5 percent) higher than year-earlier levels, but imports were 201 MMBF (21.0 percent) lower.

July 2011 U.S. Treasury Statement and Debt Overview

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Outlays of $288.4 billion and receipts of $159.1 billion added another $129.4 billion to the federal budget deficit in July. The U.S. federal debt held by the public stood at $14.342 trillion at the end of July.
 

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Foreign investors held $4.499 trillion, or a little less than one-third of the U.S. public debt at the end of June. China remained the largest foreign creditor ($1.166 trillion). China was the biggest buyer in absolute terms ($5.7 billion), but the United Kingdom was the largest in percentage terms (0.8 percent). Holdings by the “other” (aggregated) category have been trending lower since last November, dropping $103.0 billion over that time period.
 

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The Federal Reserve put more distance between itself and both China and Japan during June in terms of U.S. Treasury holdings. Moreover, were the Fed to maintain its June rate of Treasury purchases for a year, it would nearly double its current holdings. China added modest amounts to its holdings while Japan was a net seller.

More recent data shows the Fed has slowed purchases of U.S. Treasury debt since June, but still held over $1.6 trillion as of the end of July.
 

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Flows into the United States for all types of investments were overwhelmed by outflows in June, as evidenced by the sharp drop-off in three-month-average net inflows shown by the Treasury International Capital (TIC) accounting system. Net flows were -$29.5 billion in June.
 

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Short-term U.S. securities (e.g., T-bills) continued to decline in June. 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 declined rather quite noticeably (to -$4.741 billion) in June. Purchases of private equities also fell, to -$6.74 billion.

July 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 July. Over the last 12 months, the all items index increased 3.6 percent before seasonal adjustment.

The gasoline index rebounded from previous declines and rose sharply in July, accounting for about half of the seasonally adjusted increase in the all items index. The food at home index accelerated in July and also contributed to the increase, as dairy and fruit indexes posted notable increases and five of the six major grocery store food groups rose.

The seasonally adjusted Producer Price Index for Finished Goods (PPI) rose 0.2 percent in July. This advance followed a 0.4 percent decrease in June and a 0.2 percent rise in May. At the earlier stages of processing, prices received by manufacturers of intermediate goods moved up 0.2 percent in July, and the crude goods index declined 1.2 percent. On an unadjusted basis, prices for finished goods moved up 7.2 percent for the 12 months ended July 2011.
 

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Details at different stages of processing include:

Finished goods -- The advance in the finished goods index was led by prices for finished goods less foods and energy, which rose 0.4 percent. Also contributing to higher finished goods prices, the index for finished consumer foods increased 0.6 percent. By contrast, prices for finished energy goods declined 0.6 percent.

Intermediate goods -- This index advanced 0.2 percent in July after no change in June. The increase was broad based, with prices for intermediate goods less foods and energy moving up 0.2 percent, the intermediate energy goods index advancing 0.4 percent, and prices for intermediate foods and feeds edging up 0.1 percent. On a 12-month basis, the index for intermediate goods climbed 11.6 percent, the largest increase since a 15.3 percent rise in September 2008.

Crude goods -- The index for crude goods fell 1.2 percent in July. For the three-month period ending in July, prices for crude materials declined 5.8 percent following a 6.2 percent rise from January to April. In July, the monthly decrease in the crude goods index is mostly attributable to prices for crude energy materials, which fell 2.6 percent. Also contributing to the July decrease, prices for crude foodstuffs and feedstuffs declined 0.8 percent. By contrast, the index for crude nonfood materials less energy advanced 0.7 percent.
 

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Nearly all of the price index changes for the forest products that we track rose more quickly on a year-over-year basis.

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July 2011 Industrial Production, Capacity Utilization and Capacity

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Industrial production advanced 0.9 percent in July. Although the index was revised down in April, primarily as a result of a downward revision to the output of utilities, stronger manufacturing output led to upward revisions to production in both May and June. Manufacturing output rose 0.6 percent in July, as the index for motor vehicles and parts jumped 5.2 percent and production elsewhere moved up 0.3 percent. The output of mines advanced 1.1 percent, and the output of utilities increased 2.8 percent, as the extreme heat during the month boosted air conditioning usage. At 94.2 percent of its 2007 average, total industrial production for July was 3.7 percentage points above its year-earlier level. The output of Wood Products and Paper factories both rose 0.2 percent.
 

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The capacity utilization rate for total industry climbed to 77.5 percent, a rate 2.2 percentage points above the rate from a year earlier but 2.9 percentage points below its long-run (1972-2010) average. Manufacturing capacity utilization also rose by 0.4 percent from June. Wood Products increased by 0.4 percent, while Paper trailed slightly with +0.3 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.

August 2011 Macro Pulse -- Danger Close

You are in combat, pinned down by an adversary almost within arm’s reach. In desperation you call for fire from artillery or close air support. To make sure headquarters understands the enemy is practically in your foxhole, you scream “Danger close!” into the radio when relaying your coordinates. Then you hunker down and wait for the thunder of the incoming rounds, making deals with God in exchange for your life. Although much less dire than the imaginary combat scene, the U.S. economy is in a somewhat similar predicament: Beset on every side by conditions that threaten to knock it back into recession, many market participants are calling on the Federal Reserve and/or Congress to “blow away” those threats while hoping and praying they do not become collateral damage. Some of those threats include….

Click here to read the entire August 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.

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

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Bureau of Economic Analysis data showed that personal income increased $18.7 billion (0.1 percent), and disposable personal income (DPI) increased $16.3 billion (0.1 percent), in June. Personal consumption expenditures (PCE) decreased $21.9 billion (0.2 percent). Real (inflation-adjusted) DPI increased 0.2 percent while real PCE increased 0.1 percent.
 

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Retail sales rose by 0.1 percent in nominal terms during June. Motor vehicle sales exhibited the largest percent change (+0.8 percent).
 

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Total consumer debt outstanding increased for a ninth month in June, jumping to a seasonally adjusted and annualized rate of 7.7 percent. Once again, the increase in non-revolving credit was broader based than just student loans; only credit unions and pools of securitized assets saw declines on a seasonally unadjusted basis.

July 2011 Employment Report

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Headline numbers from the July employment report generally improved from June’s upwardly revised job-creation number but remained ho-hum. The July report showed the U.S. economy added 117,000 nonfarm jobs, and that the unemployment rate ticked down by 0.1 percentage point, to 9.1 percent. The change in total nonfarm payroll employment for May was revised from +25,000 to +53,000, and the change for June was revised from +18,000 to +46,000.

For once, job gains occurred across a broader spectrum of supersectors, including manufacturing, the trades, professional & business services, and education & health services. State and local governments decreased by 37,000 -- largely a function of the temporary shutdown of Minnesota’s state government.

Other details include:

• The labor force participation rate fell by 0.2 percentage point, to 63.9 percent (lowest since January 1984), accounting for the unemployment rate drop
• The actual number of employed fell by 38,000, according to the household survey
• Unemployment rose by 156,000
• Those dropping out of the labor force rose by 374,000
• The civilian population rose by 182,000 while the labor force declined by 193,000
• Persons working part time for economic reasons dropped by 146,000 but pool of full-timers also shrank by 48,000
• The average weekly workweek was unchanged at 34.3 hours
• Average private hourly earnings increased by $0.10 (2.3 percent from a year earlier) 

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June 2011 U.S. Construction

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Overall construction spending in the United States increased by 0.2 percent during June, to a seasonally adjusted and annualized rate (SAAR) of $772.3 billion. Private non-residential construction was the only category to post an increase, gaining 1.8 percent; by contrast, private residential construction fell 0.3 percent.
 

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Although the value of residential construction put in place fell, total housing starts rose by 14.6 percent -- to 629,000 units (SAAR). Even with that large a jump, however, total starts remained 72 percent below the January 2006 peak of nearly 2.3 million units.
 

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The rise in starts was almost equally balanced (on an absolute basis, at least) between the single- and multi-family components (respectively, 39,000 and 41,000 units).
 

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New-home sales retreated again in June, falling by 1.0 percent to 312,000 (SAAR). The median price of new homes sold rose 5.8 percent to $235,200. The starts-to-sales ratio appears to be stabilizing “south” of 1.4, well within the historical range.
 

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Although the slowdown in sales exceeded that of completions, the inventory of new single-family homes shrank in both months-of-inventory and absolute terms. Inventory stood at 164,000 units and 6.3 months (down from 6.4 months). Once again, the number of homes for sale was the lowest since such records began in January 1963.

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Existing home sales fared worse than their new-home counterparts in May, falling by 40,000 units (SAAR), or 0.8 percent. The share of total sales comprised of new homes remained stable at 6.1 percent.
 

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With the median existing home price rising by $14,800 (8.7 percent), to $184,600 in June, housing affordability retreated noticeably once again. The seasonally adjusted 20-city S&P/Case-Shiller home price index for May remained unchanged while the 10-city index rose by 0.1 percent.

“We [saw] some seasonal improvements with May’s data,” said David Blitzer, chair of the Index Committee at S&P Indices. “This is a seasonal period of stronger demand for houses, so monthly price increases are to be expected and were seen in [the seasonally unadjusted data for]16 of the 20 cities. The exceptions where prices fell were Detroit, Las Vegas and Tampa. However, 19 of 20 cities saw prices drop over the last 12 months. The concern is that much of the monthly gains are only seasonal.

“May’s report showed unusually large revisions across some of the metropolitan statistical areas (MSAs). In particular, Detroit, New York, Tampa and Washington DC all saw above normal revisions. Our sales pairs data indicate that these markets reported a lot more sales from prior months, which caused the revisions. The lag in reporting home sales in these markets has increased over the past few months. Also, when sales volumes are relatively low, as is the case right now, revisions are more noticeable.”
 

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“Other recent housing statistics show that single-family housing starts were up moderately in June, and are at about the same pace as a year ago,” Blitzer continued. “Existing-home sales were flat in June, reportedly because of contract cancellations and tight credit. The S&P/Experian Consumer Credit Default indices showed a continuing decline in mortgage default rates since last winter. Other reports confirm that banks have tightened lending standards in the past year, making it harder to qualify for a mortgage despite very low interest rates. Combined, these data all support a continuation of the ‘bounce-along-the-bottom’ scenario we have witnessed in the housing market over the past two years…. We have now seen two consecutive months of generally improving prices; however, we might have a long way to go before we see a real recovery. Sustained increases in home prices over several months and better annual results need to be seen before we can confirm real estate market recovery.”
 

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July 2011 ISM Reports

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The pace of growth in manufacturing slowed almost to a standstill in July, with the Institute for Supply Management’s (ISM) PMI falling to 50.9 percent, from 55.3 in June (50 percent is the breakpoint between contraction and expansion); it was the weakest reading in two years. "The PMI registered 50.9 percent, a decrease of 4.4 percentage points, indicating expansion in the manufacturing sector for the 24th consecutive month, although at a slower rate of growth than in June,” said Bradley Holcomb, chair of ISM’s Manufacturing Business Survey Committee. "Production and employment also showed continued growth in July, but at slower rates than in June. The New Orders Index registered 49.2 percent, indicating contraction for the first time since June of 2009…. The rate of increase in prices slowed for the third consecutive month, dropping 9 percentage points in July to 59 percent. In the last three months combined, the Prices Index has declined by 26.5 percentage points, dropping from 85.5 percent in April to 59 percent in July. Despite relief in pricing, however, several comments suggest a slowdown in domestic demand in the short term, while export orders continue to remain strong."

Wood and Paper Products both reported growth, although Wood Products’ growth was limited to new orders. Paper Products’ improvement, by contrast, encompassed new export and domestic orders, the need to replenish inventories, and increases in production and employment. One Paper Products respondent wrote that "export sales very strong, while domestic sales are sluggish."
 

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The non-manufacturing sector also grew at a somewhat slower pace in June, reflected by a 0.6 percentage point drop (to 52.7 percent) in the non-manufacturing index (now known simply as the “NMI”). "According to the NMI, 13 non-manufacturing industries reported growth in July,” said Anthony Nieves, chair of ISM’s Non-Manufacturing Business Survey Committee. “Respondents' comments remain mixed; however, for the most part they indicate that business conditions are flattening out." Two of the three service industries that we track expanded: Real Estate, Rental & Leasing; and Agriculture, Forestry, Fishing & Hunting. "Sales volumes are steady; input costs are increasing," one Ag & Forestry respondent indicated. Another relevant comment came from Wholesale Trade: "New home construction is still very slow; repair and remodel is the only bright spot."

As the table above indicates, the rate of input price increases slowed for both the manufacturing and service sectors. The index of prices paid by manufacturers tumbled by 9.0 percentage points, to 59.0 percent; non-manufacturers saw a smaller drop of 4.3 percentage points, to 56.6 (50 is the breakpoint between rising and falling prices).

Several relevant commodities were up in price during July: construction labor and paper products (including paper and copy paper) was listed as up in price; some respondents indicated paying more for diesel fuel and gasoline while others paid less. No relevant commodity was described as in short supply.

June 2011 Manufacturers’ Shipments, Inventories and New Orders

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Shipments and inventories both rose at the total manufacturing level during June, but new orders declined. Moreover, the individual industries we track gave lackluster performances, according to the U.S. Census Bureau.
 

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Shipments, up following two consecutive monthly decreases, rose $1.0 billion (0.2 percent) to $444.3 billion. Durable goods shipments increased $1.0 billion (0.5 percent) to $196.1 billion, led by machinery. Shipments of nondurable goods increased slightly to $248.2 billion, the highest level since the series was first published on NAICS basis, led by beverage and tobacco products. Wood shipments declined by 0.7 percent while Paper shipments rose by 0.2 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 23.2 percent jump in not-seasonally adjusted rail shipments in June (relative to May), but only a 0.9 percent rise relative to a year earlier.

The PCI (which measures diesel consumption of highway trucking) rose by 1.0 percent in June on a seasonally and workday adjusted basis relative to May; however, the index ended 2Q2011 lower than the end of 1Q. “Over the past year the U.S. economy has been in ‘she loves me, she loves me not’ mode,” said Ed Leamer, chief PCI economist and director of the UCLA Anderson Forecast. “Bad news has been alternating with good, leaving investors and forecasters nervous and unable to identify sustainable trends.”

“The PCI has had five positive and seven negative months in the last year, registering a tepid 2.0 percent increase year-over-year,” Leamer continued. “Over the same time period, GDP and payrolls have shown wobbly growth, failing to drive a real recovery or reduction in the unemployment rate. This month’s 1.0 percent increase in the PCI could be the start of a positive trend, but a one month spike does not make a trend, particularly in light of the many false starts experienced over the last year. Until there is enough data to declare a new trend, expect more of the same, somewhat disappointing result -- persistent, wobbly uncertain growth.”
 

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Inventories, up 20 of the last 21 months, increased $1.4 billion (0.2 percent) to $594.4 billion -- to the highest level since the series was first published on a NAICS basis. The inventories-to-shipments ratio was 1.34, unchanged from May.

Inventories of durable goods increased $1.8 billion (0.5 percent) to $357.8 billion, led by transportation equipment. Nondurable goods inventories decreased $0.4 billion (0.2 percent) to $236.5 billion, led by petroleum and coal products. Wood and Paper inventories both fell, by 1.7 and 0.3 percent, respectively.
 

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New orders for manufactured goods, down two of the last three months, decreased $3.8 billion (0.8 percent) to $440.7 billion. Excluding transportation, new orders increased 0.1 percent. Orders for durable goods decreased $3.8 billion (1.9 percent) to $192.4 billion while nondurable goods increased slightly to $248.2 billion.

July 2011 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate crude oil eked out a slight gain, rising by $0.90 (0.9 percent) to $97.19 per barrel. That gain coincided with a weaker dollar and a modest drop-off in crude stocks during July, but occurred despite a decrease in consumption of 250,000 barrels per day (BPD) -- to 18.4 million BPD -- during May.
 

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