3Q2011 Gross Domestic Product: Advance Estimate

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The Bureau of Economic Analysis (BEA) estimated 3Q2011 growth in real U.S. gross domestic product (GDP) at a seasonally adjusted and annualized rate of 2.5 percent, up from 1.3 percent in 2Q and the highest reading in a year. Personal consumption expenditures (PCE), private domestic investment (PDI) and net exports (NetX) contributed to 3Q growth in that order, while government consumption expenditures (GCE) were a “wash.”
 

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We cannot attribute most of the growth to a suspect GDP deflator (the statistic used to remove the effect of price changes from the real GDP estimate), because it is back in line with changes in both the consumer and producer price indices. (We discussed this topic in an earlier “Clearing the Mist” blog post.)
 

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Nonetheless, we find the GDP growth estimate -- and particularly the PCE component -- somewhat suspect in light of sour consumer sentiment reported by both Reuters/University of Michigan and The Conference Board.
 

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Interestingly, the 3Q GDP improvement has not negated the recession “call” made by Federal Reserve analyst Jeremy Nalewaik. Nalewaik’s analysis correlated the onset of recessions with a fall in the year-over-year change in gross domestic product (GDP) below 2 percent. Since 1947, the U.S. economy either was already or soon would be in recession each time the year-over-year change in GDP fell below 2 percent (the red dashed line in the figure above). The year-over-year GDP change was essentially unchanged at 1.6 percent in 3Q.

August 2011 International Trade

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According to data compiled by the Netherlands Bureau for Economic Policy Analysis, world trade volume rose by 1.3 percent in August from the previous month, following a revised increase of 1.0 percent in July. Import growth picked up in the Euro Area and, particularly strongly, in emerging economies. Exports from emerging Asia declined, however, as did exports from the United States. Euro Area exports continued to expand vigorously.

Prices rose 2.9 percent in August, to 26.9 percent above their February 2009 low.
 

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The U.S. goods and services deficit was virtually unchanged in August from July’s upwardly revised $45.6 billion. Exports totaled $177.6 billion, while imports totaled $223.2 billion.
 

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Paper exports increased by 19,000 tons (0.6 percent) in August, and imports expanded by 30,000 tons (7.7 percent). Exports remained 320,000 tons (11.2 percent) above year-earlier levels, and imports were 13,000 tons (3.2 percent) higher.
 

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Softwood lumber exports rose by 13 MMBF (9.1 percent) in August while imports retreated by 22 MMBF (2.8 percent). Exports were 35 MMBF (29.3 percent) higher than year-earlier levels, and imports were 28 MMBF (3.8 percent) higher.

September 2011 Consumer and Producer Price Indices

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The seasonally adjusted Consumer Price Index for All Urban Consumers (CPI-U) increased 0.3 percent in September. Over the last 12 months, the all-items index increased 3.9 percent before seasonal adjustment.

Increases in energy and food indexes were the main cause of the seasonally adjusted all items increase. The gasoline index continued to rise, and indexes for electricity and natural gas increased as well. Broad increases in food indexes also continued in September, with the food at home index rising 0.6 percent for the third month in a row and no major grocery store food group indexes declining.

The seasonally adjusted Producer Price Index for Finished Goods (PPI) rose 0.8 percent in September. Finished goods prices were unchanged in August and increased 0.2 percent in July. At the earlier stages of processing, prices received by manufacturers of intermediate goods moved up 0.6 percent in September, and the crude goods index advanced 2.8 percent. On an unadjusted basis, prices for finished goods climbed 6.9 percent for the 12 months ended September 2011.
 

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Details at different stages of processing include:

Finished goods -- In September, the increase in the index for finished goods was broad based, with prices for finished energy goods rising 2.3 percent, the index for finished goods less foods and energy moving up 0.2 percent, and prices for finished consumer foods advancing 0.6 percent.

Intermediate goods -- This index climbed 0.6 percent in September after falling 0.5 percent in August. Over two-thirds of this broad-based advance can be traced to prices for intermediate energy goods, which rose 1.7 percent in September. The indexes for intermediate goods less foods and energy and for intermediate foods and feeds also contributed to the increase in intermediate goods prices, moving up 0.2 percent and 0.9 percent, respectively. For the 12 months ending September 2011, the intermediate goods index jumped 10.5 percent.

Crude goods -- The index for crude goods moved up 2.8 percent in September. For the three-month period ending in September, prices for crude materials advanced 1.8 percent following a 1.1 percent decrease from March to June. In September, the monthly increase in the crude goods index is mostly attributable to prices for crude energy materials, which jumped 7.7 percent. Also contributing to the September climb was the index for crude nonfood materials less energy, which advanced 1.0 percent. By contrast, prices for crude foodstuffs and feedstuffs moved down 0.9 percent.
 

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The price indexes for the forest products that we track either rose very little or declined; also, with only a couple of exceptions, the pace of increases slowed on a year-over-year basis.
 

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September 2011 U.S. Treasury Statement and Debt Overview

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Outlays of $304.7 billion and receipts of $240.2 billion added another $64.5 billion to the federal budget deficit in September, a month that typically sees revenue slightly exceeding outlays. That brought the FY2011 U.S. federal deficit to $1.299 trillion ($5 billion higher than FY2010), and the federal debt held by the public stood at $14.790 trillion at the end of September.
 

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Foreigners held $4.573 trillion, or 31 percent of the U.S. public debt at the end of August. China remained the largest foreign creditor ($1.137 trillion). The United Kingdom was the biggest buyer in absolute terms ($43.8 billion; 12.4 percent), while the Caribbean banks had the largest percentage change ($32.5 billion; 25.3 percent). Holdings by the “other” (aggregated) category inched up in August after having trended lower since last November.
 

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The Federal Reserve continued to put more distance between itself and both China and Japan during August in terms of U.S. Treasury holdings. However, the Fed’s pace of net Treasury purchases has slowed considerably. China divested itself of some Treasuries (although the U.K. often serves as a proxy buyer for China) while Japan added modest amounts to its holdings.
 

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According to the Treasury International Capital (TIC) accounting system, flows into the United States for all types of investments broke off a four-month slide and amounted to $89.6 billion in August -- evidenced by the sharp jump in the three-month-average of net inflows.
 

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One item that bears watching is the large sell-off of U.S. Treasuries since September. The Federal Reserve holds those securities in custody for various foreign central banks. Since September, those central banks have divested themselves of $73.9 billion in Treasuries, the greatest amount on record. The concern over this development is two-fold: 1) The August 2007 sell-off either triggered -- or at least was associated with -- the first credit crisis that eventually turned into the December 2007 recession. 2) Should central bank selling continue, the Fed may become the buyer of last resort, which would likely result in higher interest rates and inflation.

September 2011 Industrial Production, Capacity Utilization and Capacity

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Industrial production increased 0.2 percent in September after having been unchanged in August. Previously, industrial production was reported to have stepped up 0.2 percent in August. For the third quarter as a whole, industrial production rose at an annual rate of 5.1 percent. Manufacturing output moved up 0.4 percent in September after having gained 0.3 percent in August. At 94.2 percent of its 2007 average, total industrial production for September was 3.2 percent above its year-earlier level. Output increased at both Wood Products and Paper plants: respectively, 2.4 and 1.1 percent.
 

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Capacity utilization for total industry edged up to 77.4 percent, a rate 1.7 percentage points above its level from a year earlier but 3.0 percentage points below its long-run (1972-2010) average. Manufacturing capacity utilization also rose by 0.3 percent from August. Wood Products and Paper capacity utilization both advanced: respectively, 2.6 and 1.2 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.

October 2011 Macro Pulse -- Sinking Ship or Rising Tide?

The story is told of a yacht owner who threw a party on his craft while it was moored. Somehow, the boat sprang a leak and began to sink. When the situation was brought to the owner’s attention, not wanting to alarm his guests, he announced, “The yacht’s not sinking; it’s just the tide coming in.” Of course, anyone giving the owner’s statement more than a moment’s thought would realize its stupidity, and that they had all better get ashore.

That parable has many parallels to today’s situation. Click here to see how, and to read the entire October 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.

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

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Bureau of Economic Analysis data showed that personal income decreased $7.3 billion (0.1 percent) and disposable personal income (DPI) decreased $5.0 billion (less than 0.1 percent) in August. It was the first income decline in nearly two years. Personal consumption expenditures (PCE) increased $22.7 billion (0.2 percent). Real (inflation-adjusted) DPI decreased 0.3 percent while real PCE decreased less than 0.1 percent.
 

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Retail sales were essentially unchanged in nominal terms during August. The “other” category exhibited the only increase (+0.2 percent), thanks to consumers spending more on essentials at gas stations and grocery stores. Excluding the volatile auto segment, retail sales rose 0.1 percent.
 

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Total consumer debt outstanding decreased in August, falling by a seasonally adjusted and annualized rate of 4.6 percent. The decrease was due entirely to seasonal adjustments, as the non-seasonally adjusted (NSA) monthly change was positive in both revolving and non-revolving debt. The overall NSA debt increase was broad based: only pools of securitized assets shrank.

September 2011 Employment Report

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According to the Bureau of Labor Statistics (BLS) non-farm payroll employment edged up by 103,000 in September, and the unemployment rate held at 9.1 percent. But one should note that the increase in employment partially reflected the return to payrolls of about 45,000 telecommunications workers who had been on strike in August. The change in total nonfarm payroll employment for July was revised from +85,000 to +127,000, and the change for August was revised from 0 to +57,000. September’s private-sector job gains occurred in professional and business services, health care and construction; by contrast, manufacturing suffered losses.
 

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Employment is converging with the previous peak at a slower pace than a year ago and any prior recession going back to 1973.
 

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Part-time employment rose by 444,000 jobs while full-time employment increased by a mere 27,000.
 

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The civilian labor force participation rate ticked higher -- to 64.2 percent -- and the annual percentage increase in average hourly earnings of production and non-supervisory employees regained some of the ground lost in August by rising by 2.0 percent; with the consumer price index for urban consumers rising at a 3.8 percent annual pace, however, wages are falling in real terms (i.e., wage increases are not keeping up with price inflation).

In summary, then, although this employment report was not awful, neither was it “anything to write home about.”

September 2011 ISM Reports

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The pace of growth in manufacturing accelerated slightly in September, with the Institute for Supply Management’s (ISM) PMI rising to 51.6 percent, from 50.6 in August (50 percent is the breakpoint between contraction and expansion). After reciting some report details, Bradley Holcomb, chair of ISM’s Manufacturing Business Survey Committee, wrapped up his comments by saying, “Comments from respondents generally reflect concern over the sluggish economy, political and policy uncertainty in Washington, and forecasts of ongoing high unemployment that will continue to put pressure on demand for manufactured products."
 

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The non-manufacturing sector grew at a somewhat slower pace in September, reflected by a 0.3 percentage point drop (to 53.0 percent) in the non-manufacturing index (now known simply as the “NMI”). "Respondents' comments reflect an uncertainty about future business conditions and the direction of the economy,” concluded Anthony Nieves, chair of ISM’s Non-Manufacturing Business Survey Committee.
 

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The situation for Wood Products improved, with increases in new and backlogged orders, production and employment; the only “downside” was an increase in inventories. Paper Products contracted, although the “bad news” was concentrated in higher input prices and new, backlogged and export orders. Nonetheless, one Paper Products respondent wrote that "orders remain consistent and steady -- no sign of lower demand."

Construction was the only industry among the three we track in the service sector to report expansion during September. Ag & Forestry remained unchanged while Real Estate contracted.

As the bar chart and table above indicate, the rate of input price increases was mixed during September: it accelerated (+0.5 percentage point) for manufacturing and slowed (-2.3 percentage points) for the service sector (again, 50 is the breakpoint between rising and falling prices).

Paper was the only relevant commodity up in price during September; corrugated containers and natural gas were down in price. Some respondents indicated paying more for diesel fuel and gasoline while others paid less. Diesel fuel was the only relevant commodity described as being in short supply.

August 2011 Manufacturers’ Shipments, Inventories and New Orders

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The value of inventories rose during August for the sectors we track, but shipments and new orders retreated according to the U.S. Census Bureau.
 

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Shipments decreased $0.9 billion (0.2 percent) to $450.2 billion following two consecutive monthly increases (including a 1.2 percent rise in July). Durable goods shipments decreased $0.3 billion (0.1 percent) to $201.1 billion, led by transportation equipment. Shipments of nondurable goods decreased $0.6 billion (0.3 percent) to $249.2 billion, largely because of declining petroleum and coal products. Wood and Paper shipments both fell -- by 1.4 and 0.6 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 33.4 percent increase in not-seasonally adjusted rail shipments in August (relative to July), and a 0.3 percent drop compared to a year earlier. Seasonal adjustments “wiped out” the 33.4 percent July-to-August advance, however; thus, the seasonally adjusted Census Bureau value and AAR volume estimates tracked together for once.

“July and August results indicate that the PCI will decline in the third quarter suggesting GDP growth of 0.0 to 1.0 percent,” said Ed Leamer, chief economist for the Ceridian-UCLA Pulse of Commerce Index. “The August number supports the pattern of sluggish economic growth coming out of a recession…. What we’re experiencing is the ‘new normal,’ where the U.S. economy will continue to stumble forward until a new growth engine is identified. Essentially, the economy is in need of an innovation burst.”
 

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Inventories, up 22 of the last 23 months, increased $2.4 billion (0.4 percent) to $601.2 billion. This was at the highest level since the series was first published on a NAICS basis in 1992. The inventories-to-shipments ratio was 1.34, up from 1.33 in July.

Durable goods inventories increased $3.3 billion (0.9 percent) to $365.4 billion, also the highest level since the series was first published on a NAICS basis; the increase was led by transportation equipment. By contrast, inventories of nondurable goods decreased $0.8 billion (0.4 percent) to $235.8 billion, driven lower by petroleum and coal products. Wood and paper inventories both rose, by 0.3 and 0.4 percent, respectively.
 

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New orders for down two of the last three months, decreased $0.8 billion (0.2 percent) to $451.0 billion. This followed a 2.1 percent July increase. Excluding transportation, new orders decreased 0.2 percent. Durable goods orders decreased $0.2 billion (0.1 percent) to $201.9 billion, led by fabricated metal products. Orders for nondurable goods decreased $0.6 billion (0.3 percent) to $249.2 billion.

August 2011 U.S. Construction

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Overall construction spending in the United States increased by 1.4 percent during August, to a seasonally adjusted and annualized rate (SAAR) of $799.1 billion. All categories posted increases, but public construction showed the largest advance in both absolute and percentage terms.
 

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Although the value of residential construction put in place rose in August, total housing starts declined -- by 5.0 percent, to 571,000 units (SAAR).
 

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The drop in total starts was primarily the result of a fallback in the multi-family category, which retreated by 24,000 units (13.5 percent).
 

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New-home sales retreated again in August, by 2.3 percent to 295,000 (SAAR). The median price of new homes sold also dropped by 8.7 percent, to $209,000. Despite single-unit starts declining more slowly than sales (6,000 versus 7,000, respectively), the starts-to-sales ratio ticked down to 1.4.
 

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Single-unit completions fell by 0.2 percent, but the inventory of new single-family homes shrank slightly in absolute terms while months of inventory bumped 0.1 month higher. Inventory stood at 162,000 units and 6.6 months. Once again, the number of new homes for sale was its lowest since such records began in January 1963.
 

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Existing home sales fared much better than their new-home counterparts in August, rising by 360,000 units (SAAR) or 7.7 percent. The share of total sales comprised of new homes shrank to 5.5 percent.
 

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With the median price of existing homes sold falling by $3,300 (1.9 percent), to $168,400, housing affordability improved again in August. This followed on the heels of mixed results in the seasonally adjusted 10- and 20-city S&P/Case-Shiller home price indices during July (less than +/-0.1 percent in either case).

“With July’s data we are seeing not only anticipated monthly increases [on a seasonally unadjusted basis], but some fairly broad improvement in the annual rates of change in home prices,” said David Blitzer, chair of the Index Committee at S&P Indices. “This is still a seasonal period of stronger demand for houses, so monthly price increases are expected and were seen in 17 of the 20 cities. The exceptions were Las Vegas and Phoenix where prices fell, while Denver was flat. The better news is that 14 of 20 cities and both Composites saw their annual rates of change improve in July.

“While we have now seen four consecutive months of generally increasing prices, we do know that we are still far from a sustained recovery. Eighteen of the 20 cities and both Composites are showing that home prices are still below where they were a year ago. The 10-City Composite is down 3.7 percent and the 20-City is down 4.1 percent compared to July 2010. Continued increases in home prices through the end of the year and better annual results must materialize before we can confirm a housing market recovery.
 

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“As with May and June’s reports, we saw some unusually large revisions across some of the MSAs. In particular, Detroit was most affected in July, with the revisions showing a much healthier market than previously thought. Our sales pairs data indicate that this market reported a lot more sales in May and June, which caused the revisions. As we have indicated before, when sales volumes are relatively low and the ratios of distressed-to-non-distressed sales are changing rapidly, revisions are more noticeable. These factors likely contributed to the revisions we saw not just in Detroit, but in many of the MSAs over the past few reports.

“Other recent housing statistics show that single-family housing starts were down slightly in August, and are about 2 percent below their year ago level; and these levels are at 30-year lows. Existing-home sales, however, were up in August and are about 20 percent above their August 2010 level. The S&P/Experian Consumer Credit Default indices showed a continuing decline in mortgage default rates, a two-year trend. However, if you look at the state of the overall economy and, in particular, the recent large decline in consumer confidence, these combined statistics continue to indicate that the housing market is still bottoming and has not turned around.”
 

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