September 2011 International Trade

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According to data compiled by the Netherlands Bureau for Economic Policy Analysis, world trade volume declined by 1.0 percent in September from the previous month, following a revised increase of 1.4 percent in August. Imports declined in advanced and emerging economies. Exports of the advanced countries rose a little, thanks to the performance of the United States and Japan. Exports of the emerging markets fell, particularly in Asia and Central- and Eastern Europe. Prices fell 1.9 percent in September, to 25.8 percent above their February 2009 low.
 

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The U.S. goods and services deficit was $43.1 billion in September, down from a revised $44.9 billion in August. Exports amounted to $180.4 billion and imports $223.5 billion. According to Barron’s, about half of the unexpected improvement in the deficit came from gold exports.
 

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Paper exports increased by 9,000 tons (0.3 percent) in September, and imports shrank by 20,000 tons (4.7 percent). Exports remained 342,000 tons (12.1 percent) above year-earlier levels, but imports were 21,000 tons (4.9 percent) higher.
 

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Softwood lumber exports fell by 21 MMBF (13.5 percent) in September while imports advanced by 42 MMBF (5.5 percent). Exports were 8 MMBF (6.2 percent) higher than year-earlier levels, and imports were 78 MMBF (10.4 percent) higher.

3Q2011 Gross Domestic Product: Second 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 2.0 percent, down from the advance estimate of 2.5 percent but up from 1.3 percent in 2Q. Despite the downward revision, the 3Q estimate was the highest reading in a year. Personal consumption expenditures (PCE) and net exports (NetX) contributed to 3Q growth in that order, while private domestic investment (PDI) and government consumption expenditures (GCE) exerted “drags.”
 

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Among the notable items in the report (from the Consumer Metrics Institute):

-- Aggregate consumer expenditures for goods was revised downward slightly to a +0.30 percent annualized growth (previously reported to be +0.35 percent).

-- The annualized growth rate for consumer expenditures was also revised downward by 0.05 percent, and is now estimated to be at 1.33 percent.

-- The growth rate of private fixed investments was lowered by 0.15 percent, with the new number coming in at 1.45 percent.

-- The draw-down of inventories is now nearly a half percent worse than previously reported, pulling -1.55 percent from the headline annualized growth rate. Conventional wisdom is that this bodes well for the economy in the future, since production will presumably have to eventually ramp-up to replace that lost inventory.

But in fact there are a number of wildly conflicting ways to “spin” this inventory number:

-- Production has lagged demand, with factories struggling to keep up with increasing demand (unfortunately implausible given the anemic consumer growth numbers mentioned above);

-- Factories are reducing inventories in anticipation of weakening demand (plausible);

-- Inventory levels were ridiculously high to begin with (implying that much of the "recovery" was wishful thinking; again plausible);

-- Factories have simply cut production costs by cutting production levels (thereby inflating bottom lines without the benefit of increasing commerce; highly plausible);

-- Or our favorite: the BEA's deflators have shot them in the foot again (with deflating commodity prices "shrinking" inventories even as physical inventories remain largely unchanged; also highly plausible).

Of the five spin scenarios outlined above, the only positive one is also the least plausible.

-- Total expenditures by governments at all levels is now reported to be very slightly contracting, continuing a string of four quarters of contraction. This number masks a duality in state and local spending levels, where "consumption expenditures" (i.e., operating budgets) continue to shrink but are partially offset by increasing investments on infrastructure.

-- Exports are now reported to be slightly higher relative to the previous estimate, raising the contribution that they made to the overall GDP growth rate to +0.58 percent.

-- Imports dropped substantially compared to the previous "advance" report, and are now removing only -0.09 percent from the growth rate of the overall economy (previously this number was -0.34 percent, a full quarter of a percent worse for the headline number).

-- The annualized growth rate of "real final sales of domestic product" was revised up slightly to +3.56 percent. This was the result of the higher draw-down of inventories offsetting the generally weaker numbers shown elsewhere.

-- Perhaps the most negative item among the revisions is in per-capita disposable income, which was revised sharply downward and is now reportedly shrinking at an annualized -2.1 percent rate during the third quarter (revised from a -1.7 percent in the previous "Advance" estimate). If you are looking for one line item that largely explains the mood of the general public, this is the one to monitor.

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The GDP has strengthened 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 now stands at 1.5 percent in 3Q.

October 2011 U.S. Treasury Statement and Debt Overview

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Outlays of $261.5 billion and receipts of $163.1 billion added $98.5 billion to the federal budget deficit in October, the first month of fiscal year 2012. The federal debt held by the public stood at $14.994 trillion at the end of October.
 

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Foreigners held $4.660 trillion, or 31 percent of the U.S. public debt at the end of September. China remained the largest foreign creditor ($1.148 trillion). The United Kingdom was the biggest buyer in absolute terms ($24.4 billion; 6.1 percent), while the Caribbean banks had the largest percentage change ($11.8 billion; 7.3 percent). Holdings by the “other” (aggregated) category inched up for a second month in September.
 

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The Federal Reserve continued to add to its holdings of U.S. Treasury securities. However, the Fed’s pace of net Treasury purchases has slowed considerably.
 

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According to the Treasury International Capital (TIC) accounting system, net flows into the United States for all types of investments amounted to $57.4 billion in September.
 

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Delving into the TIC report details reveals that long-term U.S. public debt was the only category with positive net inflows. Long-term private equities and short-term public debt saw net outflows.
 

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The large sell-off of U.S. Treasuries in September and October appears to have been reversed. The Federal Reserve holds those securities in custody for various foreign central banks. That sell-off had raised red flags in the markets for two reasons: 1) The August 2007 divestiture either triggered -- or at least was associated with -- the first credit crisis that eventually turned into the December 2007 recession. 2) Had central bank selling continued, the Fed could have become the buyer of last resort, likely resulting in much higher interest rates and inflation.

October 2011 Consumer and Producer Price Indices

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The seasonally adjusted Consumer Price Index for All Urban Consumers (CPI-U) decreased 0.1 percent in October. Over the last 12 months, the all items index increased 3.5 percent before seasonal adjustment.

A decline in the energy index more than offset small increases in the indexes for food and all items less food and energy to create the all items decline. The energy index turned down in October after increasing in each of the three previous months as the gasoline and household energy indexes declined after a series of seasonally adjusted increases. The food index rose in October, but posted its smallest increase of the year as the fruits and vegetables index declined sharply.

The index for all items less food and energy increased 0.1 percent in October; this was the same increase as last month and matches its smallest increase of the year. While the shelter and medical care indexes accelerated in October and the apparel index turned up, the indexes for new vehicles, used cars and trucks, airline fare, and recreation all declined.

The all items index has risen 3.5 percent over the last 12 months, a lower figure than last month's 3.9 percent increase, as the 12-month change in the energy index fell from 19.3 to 14.2 percent. In contrast, the 12-month change for all items less food and energy edged up from 2.0 to 2.1 percent. The food index 12-month change was 4.7 percent, the same figure as in September.

The seasonally adjusted Producer Price Index for Finished Goods (PPI) declined 0.3 percent in October. Finished goods prices rose 0.8 percent in September and were unchanged in August. At the earlier stages of processing, the index for intermediate goods moved down 1.1 percent in October and crude goods prices fell 2.5 percent. On a seasonally unadjusted basis, the finished goods index increased 5.9 percent for the 12 months ended October 2011, the smallest year-over-year advance since a 5.6-percent rise in March 2011.
 

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Details at different stages of processing include:

Finished goods -- In October, the decrease in finished goods prices was the result of a 1.4 percent drop in the index for finished energy goods. By contrast, prices for finished consumer foods inched up 0.1 percent. The index for finished goods less foods and energy was unchanged.

Intermediate goods -- This index fell 1.1 percent, the largest decline since a 1.5-percent drop in March 2009. Over half of the broad-based October decrease can be traced to prices for intermediate energy goods, which fell 2.6 percent. The indexes for intermediate goods less foods and energy and for intermediate foods and feeds also contributed to the decline in intermediate goods prices, falling 0.6 percent and 1.5 percent, respectively. For the 12 months ending October 2011, the intermediate goods index advanced 8.3 percent, the smallest year-over-year rise since an 8.1-percent increase in February 2011.

Crude goods -- The index for crude goods fell 2.5 percent in October. For the 3 months ending in October, prices for crude materials advanced 0.4 percent following a 5.9-percent decrease from April to July. In October, nearly forty percent of the broad-based monthly decline can be traced to a 4.3-percent drop in the index for crude nonfood materials less energy. Lower prices for crude energy materials and for crude foodstuffs and feedstuffs -- down 2.2 percent and 1.8 percent, respectively -- also contributed to the October decrease in the crude goods index.
 

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Half of the price indices for the forest products that we track rose relative to September, while the other half declined. All were higher in October than a year earlier; however, two rose more quickly on a year-over-year basis than in September, three more slowly and one was essentially unchanged.
 

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October 2011 Industrial Production, Capacity Utilization and Capacity

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Industrial production expanded 0.7 percent in October after having declined 0.1 percent in September. Previously, industrial production was reported to have gained 0.2 percent in September; most of this revision resulted from lower estimated output for mining. Factory output increased 0.5 percent in October after having risen 0.3 percent in September. At 94.7 percent of its 2007 average, total industrial production for October was 3.9 percent above its year-earlier level. Output decreased at both Wood Products and Paper plants: respectively, 2.2 and 0.3 percent.

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Capacity utilization for total industry stepped up to 77.8 percent, a rate 2.1 percentage points above its level from a year earlier but 2.6 percentage points below its long-run (1972--2010) average. Manufacturing capacity utilization also rose by 0.4 percent from August. Wood Products and Paper capacity utilization both retreated: respectively, 2.0 and 0.2 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.

November 2011 Macro Pulse -- 3Q2011 GDP: Game Changer or Just Extra Innings?

Game 6 of the 2011 World Series: The St. Louis Cardinals were behind three games to two. Down by two runs in the ninth inning, with two outs but two on base, the Cards’ David Freese was at the plate with two strikes -- one strike away from losing the game and the series. But the third strike never came. Freese hit a triple instead, scoring two runs and tying the game to send it into extra innings. On his next at-bat Freese won the game with a solo home run in the eleventh inning. St. Louis took Game 7 and the Series the next night.

In some respects, the advance 3Q2011 GDP report resembled Freese’s triple in Game 6. Click here to see how, and to read the entire November 2011 Macro Pulse recap.

The Macro Pulse blog is a commentary about recent economic developments affecting 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.

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

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Bureau of Economic Analysis data showed that personal income increased $17.3 billion (0.1 percent) and disposable personal income (DPI) increased $12.9 billion (0.1 percent) in September. Personal consumption expenditures (PCE) increased $68.7 billion (0.6 percent). Real (inflation-adjusted) DPI decreased 0.1 percent while real PCE increased 0.5 percent.
 

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With such an imbalance between the change in incomes and outlays, the personal saving rate dropped to 3.6 percent, well off the recent peak of 5.3 percent seen in June.
 

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Consumers stepped up spending on retail goods in September, by 1.1 percent -- the largest gain in seven months. Vehicle sales saw the biggest jump ($2.4 billion or 3.6 percent) among the various categories; without the auto category, retail sales rose by 0.6 percent.
 

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Total consumer debt outstanding increased in September, rising by a seasonally adjusted and annualized rate of 3.6 percent. Although some other categories ticked higher, the vast majority of the increase in consumer debt originated with student loans.

October 2011 Employment Report

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According to the Bureau of Labor Statistics (BLS) non-farm payroll employment continued to trend up in October (+80,000), and the unemployment rate was little changed at 9.0 percent. Employment in the private sector rose (+104,000), with modest job growth continuing in professional and businesses services, leisure and hospitality, health care, and mining. Government employment continued to trend down (-24,000), especially at the state level.
 

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

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Part-time employment fell by 374,000 jobs while full-time employment increased by 421,000. The trend for part-time employment appears to be stable to declining slightly; the full-time trend is solidly, although modestly, higher if viewed from January 2010.
 

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The civilian labor force participation rate remained at 64.2 percent. The annual percentage increase in average hourly earnings of production and non-supervisory employees dropped to 1.6 percent, nearly on par with the historical low set back in February 2004. With the consumer price index for urban consumers rising at a 3.9 percent annual pace, 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 does it portend strong economic growth.

September 2011 U.S. Construction

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Overall construction spending in the United States increased by 0.2 percent during September, to a seasonally adjusted and annualized rate (SAAR) of $787.2 billion. All categories except public construction posted increases; the private residential category exhibited the largest advance in both absolute and percentage terms.
 

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Total housing starts jumped by 15.0 percent in September, to 658,000 units (SAAR), on increased demand for rental stock (51.3 percent increase in multi-family units) and rebuilding after Hurricane Irene. Total starts were at their highest level since April 2010.
 

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New-home sales also advanced in September, by 5.7 percent to 313,000 (SAAR). The median price of new homes sold dropped by 3.1 percent, however, to $204,400. Because single-unit starts rose more slowly than sales (respectively, 7,000 versus 17,000), the starts-to-sales ratio ticked down to 1.4.
 

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Single-unit completions slumped by 11.6 percent, but the inventory of new single-family homes remained unchanged in absolute terms while months of inventory shrank by 0.4 month. Inventory stood at 163,000 units and 6.2 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 worse than their new-home counterparts in September, falling by 150,000 units (SAAR) or 3.0 percent. The share of total sales comprised of new homes ticked up to 6.0 percent.
 

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With the median price of existing homes sold falling by $5,600 (3.3 percent), to $165,600, housing affordability improved noticeably in September. This followed on the heels of slight increases in the not seasonally adjusted 10- and 20-city S&P/Case-Shiller home price indices during August (both +0.2 percent).

“There was some weakness in the monthly statistics, as 10 of the cities posted price declines in August over July,” said David Blitzer, chair of the Index Committee at S&P Indices. “And even though the annual rates are largely improving, 18 metropolitan statistical areas (MSA) and both composites are still negative. Nationally, home prices are still below where they were a year ago. The 10-city composite is down 3.5 percent and the 20-city is down 3.8 percent compared to August 2010.
 

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“In the August data, the good news is continued improvement in the annual rates of change in home prices. In spring and summer’s seasonally strong period for housing demand, we cautioned that monthly increases in prices had to be paired with improvement in annual rates before anyone could declare that the market might be stabilizing. With 16 of 20 cities and both Composites seeing their annual rates of change improve in August, we see a modest glimmer of hope with these data. As of August 2011, the crisis low for the 10-city composite was back in April 2009; whereas it was a more recent March 2011 for the 20-city composite. Both are about 3.9 percent above their relative lows.

“The Midwest is one region that really stands out in terms of recent relative strength. Chicago, Detroit and Minneapolis have all posted very sharp monthly increases going back to May. These markets were some of the weakest during the crisis, particularly Detroit. But as of August 2011, Detroit is the healthiest when viewed on an annual basis. It is up 2.7 percent versus August 2010. Prices there are still back to their 1995 levels, but the recent pickup in the US auto industry may finally be helping.

“As seen in our past few monthly reports, there were large revisions across some of the MSAs. In particular, Washington D.C. was the most affected in August. Additional sale pairs data for May to July 2011 in the Washington D.C. MSA were received this month and resulted in the revisions.”
 

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September 2011 Manufacturers’ Shipments, Inventories and New Orders

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According to the U.S. Census Bureau, the value of shipments, inventories and new orders were mixed during September.
 

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Shipments increased for a fourth month, by $1.3 billion (0.3 percent) to $452.7 billion. Durable goods shipments decreased $1.3 billion (0.6 percent) to $200.2 billion, led by transportation equipment.

Shipments of nondurable goods increased $2.6 billion (1.0 percent) to $252.5 billion, led by petroleum and coal products. Wood and Paper shipments both declined -- by 0.2 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 19.4 percent decrease in not-seasonally adjusted rail shipments in September (relative to August), and a 1.1 percent rise compared to a year earlier. Seasonal adjustments boosted the 19.4 percent August-to-September decline into a 1.1 percent gain, however; thus, the seasonally adjusted Census Bureau value for total manufacturing and AAR volume estimates tracked together again.

The PCI, which tracks diesel use for over-the-highway trucking, fell 1.0 percent in September on a seasonally and workday adjusted basis. Ed Leamer, PCI chief economist said, “With the continued weakness in September, the PCI-based forecast for third quarter GDP growth is zero,” well under the subsequent, official estimate of 2.5 percent.
 

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Inventories, up 23 of the last 24 months, increased $0.6 billion (0.1 percent) to $601.3 billion -- once again the highest level since the series was first published on a NAICS basis in 1992. The inventories-to-shipments ratio was 1.33, unchanged from August.

Durable goods inventories increased $0.4 billion (0.1 percent) to $365.6 billion, led by transportation equipment. Inventories of nondurable goods increased $0.3 billion (0.1 percent) to $235.7 billion, also led by petroleum and coal products. Forest products inventories were split, with Wood declining by 0.8 percent and Paper rising by 0.2 percent.
 

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New orders increased for a third month in September, by $1.4 billion (0.3 percent), to $453.5 billion. Excluding transportation, new orders increased 1.3 percent. Durable goods orders decreased $1.2 billion (0.6 percent) to $201.0 billion, led yet again by transportation equipment. New orders for manufactured nondurable goods increased $2.6 billion (1.0 percent) to $252.5 billion.

October 2011 ISM Reports

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The pace of growth in manufacturing nearly stalled again in October, with the Institute for Supply Management’s (ISM) PMI falling to 50.8 percent, from 51.6 in September (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 are mixed, indicating positive relief from raw materials pricing and continuing strength in a few industries, but there is also more concern and caution about growth in this uncertain economy."
 

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The non-manufacturing sector also grew at a marginally slower pace in September, reflected by a 0.1 percentage point drop (to 52.9 percent) in the non-manufacturing index (now known simply as the “NMI”). "Even though there is month-over-month growth in the Employment Index, respondents are still expressing concern over available labor resources and job growth,” concluded Anthony Nieves, chair of ISM’s Non-Manufacturing Business Survey Committee. “The continued strong push for inventory reduction by supply management professionals has resulted in contraction in the Inventories Index for the first time in eight months. Respondents' comments are mixed and reflect concern about future business conditions.”
 

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Wood Products was unchanged, with higher production being offset by fewer new orders. Paper Products expanded, but declines in new, backlogged and export orders suggest more difficulty in the future.

Real Estate and Construction both reported contraction in overall activity during October, while Ag & Forestry remained unchanged.

As the bar chart and table above indicate, input price behavior was mixed during October: prices fell for manufacturing but rose more slowly for the service sector.

Paper and plywood were the only relevant commodities up in price during October; diesel fuel and gasoline were down in price. No relevant commodity was described as being in short supply.