4Q2011 Gross Domestic Product: Advance Estimate

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The Bureau of Economic Analysis (BEA) estimated 4Q2011 growth in real U.S. gross domestic product (GDP) at a seasonally adjusted and annualized rate of 2.8 percent, up from the final estimate of 1.8 percent in 3Q. Private domestic investment (PDI) – especially private inventories – and personal consumption expenditures (PCE) contributed to 3Q growth in that order, while net exports (NetX) and government consumption expenditures (GCE) exerted “drags.”
 

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Consumer Metrics Institute made the following observations:

-- The annualized growth rate for consumer expenditures for goods was sharply higher at 1.34 percent, up over one percentage point from the 0.33 percent rate reported for 3Q2011. On the other hand, consumer services plummeted -- losing 0.80 percentage point as the growth rate fell to 0.10 percent. This is likely a sign of both dropping demand and eroding prices within the consumer services sector. This drop in the consumption of consumer services offsets the bulk of the increase in spending on consumer goods, with the aggregate contribution to the headline number ending up at only +0.21 percent.

-- The growth rate of private fixed investments also dropped significantly to 0.41 percent, over one percentage point lower than the 1.52 percent annualized rate reported for 3Q.

-- The growth rate of inventories represented the true "wild card" in the report, swinging from a 3Q contraction of -1.35 percent to a newly reported growth rate of +1.94 percent -- a change of nearly +3.3 percentage points in its contribution to the headline number. This apparently wild swing could be the result of either real changes in inventory levels or phantom changes as commodity prices firmed inventory valuations after dropping dramatically during 3Q. If the changes are real, it is likely that manufacturers were rebuilding inventories after being overly cautious during 3Q, following their classic pattern of a lagging over-correction. In that scenario we should expect this line item to revert to long-term trend lines during 1H2012, lowering the headline numbers at that time. However, if the numbers are the phantom result of changes in commodity pricing (particularly oil) impacting inventory valuations even as physical levels remain largely unchanged, then the headline number is largely meaningless and we can expect the quality of the GDP numbers to continue to be held hostage by the BEA's price deflators. [Ed note: Given that the quarter-to-quarter percentage change in the GDP deflator was in line with the changes in both the CPI-U and PPI, we tend to think CMI’s inventory-building hypothesis is the correct one. For more on that topic, see our blog post Of GDP Growth and Deflators: Smoke and Mirrors? ]

-- Another major swing in the numbers concerned total expenditures by governments at all levels, which is now contracting at a -0.93 percent annualized rate (a significant weakening from the -0.02 percent rate during 3Q) -- a rate that continues a string of five consecutive quarters of contraction. It also reflects a change to annualized contraction at all levels of government (Federal, state and local) -- and most notably in Federal defense spending.
 

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The 4Q GDP estimate leaves the recession call made by Federal Reserve analyst Jeremy Nalewaik essentially unchanged. 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 stood at 1.56 percent in 4Q.

November 2011 International Trade

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According to data compiled by the Netherlands Bureau for Economic Policy Analysis, world trade volume increased by 1.0 percent in November from the previous month, following a revised decline of 0.7 percent in October. Both import and export volumes made a remarkable jump in Central and Eastern Europe. Euro Area exports surged as well. In Japan, on the other hand, both exports and imports declined substantially. World trade prices dropped 0.3 percent in November.
 

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Total November exports of $177.8 billion and imports of $225.6 billion resulted in a goods and services deficit of $47.8 billion, up from $43.3 billion in October. November exports were $1.5 billion less than October exports of $179.4 billion. November imports were $2.9 billion more than October imports of $222.6 billion.
 

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Paper exports slumped by 265,000 tons (8.3 percent) in November, while imports ticked up by 13,000 tons (3.3 percent). Exports remained 34,000 tons (1.2 percent) above year-earlier levels, but imports were 41,000 tons (9.1 percent) lower.
 

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Softwood lumber exports fell by 7 MMBF (4.8 percent) in November and imports retreated by 84 MMBF (9.9 percent). Exports were 10 MMBF (8.0 percent) higher than year-earlier levels; imports were 30 MMBF (4.0 percent) higher.

December 2011 U.S. Treasury Statement and Debt Overview

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Outlays of $325.9 billion and receipts of $240.0 billion added $86.0 billion to the federal budget deficit in December. The federal debt held by the public stood at $15.223 trillion at the end of December.
 

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Foreigners held $4.751 trillion, or 31 percent of the U.S. public debt at the end of November. China remained the largest foreign creditor ($1.133 trillion). Japan was the biggest buyer in both absolute and percentage change terms ($59.9 billion; 6.1 percent) in November, followed by the United Kingdom ($18.2 billion; 4.4 percent). The U.K. is often considered a proxy for China, which sold $1 billion in November.
 

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Even the Federal Reserve trimmed its holdings of U.S. Treasury securities slightly (-$6 billion, or -$72 billion annualized) in November.
 

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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 $48.6 billion in November; that brought the three-month moving average to $24.0 billion.
 

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Delving into the TIC report details reveals that long- and short-term U.S. public debt saw net inflows. Long-term private equities, by contrast, saw net outflows.

December 2011 Consumer and Producer Price Indices

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The seasonally adjusted Consumer Price Index was unchanged in December. Over the last 12 months, the all items index increased 3.0 percent before seasonal adjustment.

Similar to last month, the energy index declined in December and offset increases in other indexes. The gasoline index declined for the third month in a row and the household energy index declined as well. The food index rose in December, with the index for food at home turning up after declining last month.

The index for all items less food and energy increased 0.1 percent in December after rising 0.2 percent in November. The indexes for shelter, recreation, medical care, and tobacco all posted increases, while the indexes for used cars and trucks, new vehicles, and apparel all declined.

The all items index has risen 3.0 percent over the last 12 months, a decline from last month's 3.4 percent figure. Recent declines in the energy index have brought its 12-month change down to 6.6 percent from 19.3 percent in September. The 12-month change in the index for all items less food and energy held at 2.2 percent, while the 12- month change in the food index edged up from 4.6 percent to 4.7 percent.

The seasonally adjusted Producer Price Index for finished goods (PPI) declined 0.1 percent in December. Prices for finished goods moved up 0.3 percent in November and fell 0.3 percent in October. At the earlier stages of processing, the index for intermediate goods decreased 0.5 percent in December, and crude goods prices moved down 1.1 percent. On an unadjusted basis, the index for finished goods increased 4.8 percent in 2011 after rising 3.8 percent in 2010.
 

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Details at different stages of processing include:

Finished goods -- The December decline in finished goods prices is attributable to decreases of 0.8 percent in the indexes for finished energy goods and finished consumer foods. By contrast, prices for finished goods less foods and energy increased 0.3 percent.

Intermediate goods -- This index fell 0.5 percent in December after rising 0.2 percent in November. Accounting for three-quarters of this broad-based decline, the index for intermediate materials less foods and energy decreased 0.5 percent. Prices for intermediate energy goods and for intermediate foods and feeds moved down 0.3 percent and 0.6 percent, respectively. In 2011, prices for intermediate goods rose 6.1 percent after increasing 6.3 percent in 2010.

Crude goods -- The index for crude goods decreased 1.1 percent in December. For the three months ending in December, prices inched up 0.1 percent following a 1.8 percent rise from June to September. The December monthly decline is mostly attributable to the index for crude foodstuffs and feedstuffs, which fell 2.6 percent. Prices for crude energy materials edged down 0.1 percent and the index for crude nonfood materials less energy was unchanged.
 

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A majority of the individual price indices we track were either unchanged or increased relative to November; two declined. All except softwood lumber had higher indices in December than a year earlier. Only pulpwood rose more quickly on a year-over-year basis in December than in November.
 

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December 2011 Industrial Production, Capacity Utilization and Capacity

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Industrial production increased 0.4 percent in December after having fallen 0.3 percent in November. For 4Q2011 as a whole, industrial production rose at an annual rate of 3.1 percent, its tenth consecutive quarterly gain. In the manufacturing sector, output advanced 0.9 percent in December with similarly sized gains for both durables and nondurables. At 95.3 percent of its 2007 average, total industrial production in December was 2.9 percent above its level of a year earlier. Wood Products output jumped by 4.2 percent but Paper output fell by 1.0 percent.
 

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The capacity utilization rate for total industry rose to 78.1 percent, an increase of 0.4 percent from a month earlier but a rate 2.3 percentage points below its long-run (1972--2010) average. Wood Products and Paper capacity utilization was split: respectively, +4.4 and -0.9 percent.
 

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Capacity at the all-industries and manufacturing levels crept higher (0.1 percent); By contrast, Wood Products dropped by 0.2 percent while Paper declined by 0.1 percent.

January 2012 Macro Pulse -- Forecasting in a Blizzard

Dating in the upper Midwest during the early 1980s sometimes meant returning home in the dead of night and amidst a blinding snowstorm. There was no feeling quite like being unable to tell which ditch the car was heading toward, and -- having no cell phone -- knowing that ending up in one could mean either hours alone in a freezing cold car or a miles-long slog through the drifts.

Economic forecasting has a bit of that same feel right now. Each statistical release, news blurb and blog commentary is like a snowflake. They come in an unending flurry, swirling every which way until one has a difficult time telling whether the economy is growing or contracting, and in what direction it is likely to head. Some of those conflicting developments include…

Click here to read the entire January 2012 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.

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

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Bureau of Economic Analysis data showed that personal income increased $8.5 billion (0.1 percent) and disposable personal income (DPI) decreased $5.0 billion (less than 0.1 percent), in November. Personal consumption expenditures (PCE) increased $13.1 billion (0.1 percent) in November. Real (inflation-adjusted) DPI decreased less than 0.1 percent while real PCE increased 0.2 percent.
 

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With real DPI growth essentially stalling on a year-over-year basis, consumers are reducing their rate of saving to maintain their lifestyles. The personal saving rate fell back to 3.5 percent in November, the lowest since the beginning of the recession in December 2007.
 

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Consumers bumped up spending on retail goods in November for everything except meals away from home. Overall, spending rose 0.2 percent. The “other” category saw the biggest absolute jump ($659 million) but vehicles experienced the largest percentage change (0.5 percent). The biggest winners in November were electronics retailers, whose sales jumped 2.1 percent as consumers snapped up new mobile phones, iPads, electronic-book readers and high-definition televisions.
 

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Total consumer debt outstanding surged in November, rising by a seasonally adjusted and annualized $20.4 billion (10 percent), the largest monthly gain in a decade. Credit card debt rose by $5.6 billion (8.5 percent), the most since March 2008, while non-revolving debt (mainly student and auto loans) increased $14.8 billion (10.7 percent), nearly matching July's gain that was the biggest since February 2005. Student loans comprised over 75 percent of the gain in the non-revolving loan category.

December 2011 Employment Report

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According to the Bureau of Labor Statistics (BLS) non-farm payroll employment rose by 200,000 in December, and the unemployment rate dropped to 8.5 percent. Over the past 12 months, nonfarm payroll employment has risen by 1.6 million. Employment in the private sector rose by 212,000 in December and by 1.9 million over the year. Employment in transportation and warehousing rose sharply in December (+50,000). Almost all of that gain resulted from seasonal hiring in the couriers and messengers industry (+42,000). Government employment changed little in December but was down by 280,000 over the year. Public sector job losses during 2011 were concentrated in local government; state government, excluding education; and the U.S. Postal Service. The change in total nonfarm payroll employment for October was revised from +100,000 to +112,000, and the change for November was revised from +120,000 to +100,000.
 

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As we have been pointing out for quite some time, employment is converging with the previous peak at a slower pace than any prior recession going back to 1973. The economy still has 6.0 million fewer jobs than at the beginning of the 2007 recession.

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Also, the number of persons not in the labor force reached a new high of nearly 87 million. In addition, the ratio of employed persons relative to the total population (EPR) has barely budged off its February 2010 low; the EPR is at levels comparable to those seen in the late 1980s.
 

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The civilian labor force participation rate remained at 64.0 percent, while the annual percentage increase in average hourly earnings of production and non-supervisory employees ticked higher to just over 1.6 percent, barely above the historical low set back in February 2004. With the consumer price index for urban consumers rising at a 3.4 percent annual pace, wages are falling in real terms (i.e., wage increases are not keeping up with price inflation).
 

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On a somewhat brighter note, part-time employment fell by 371,000 jobs while full-time employment increased by a more substantial 553,000. The declining trend for part-time employment appears to be strengthening; the full-time trend is solidly, although modestly, higher if viewed from January 2010.

In summary, this employment report was better than expectations, but then expectations are rather low.

November 2011 U.S. Construction

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Overall construction spending in the United States increased by 1.2 percent during November, to a seasonally adjusted and annualized rate (SAAR) of $807.1 billion. All except the private non-residential category posted increases; the private residential category exhibited the largest advance in both absolute and percentage terms.
 

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Total housing starts rose by 9.3 percent in November, to 685,000 units (SAAR) – nearly 25 percent over year-earlier levels. Single-family starts rose to 447,000 units (10,000 units or 2.3 percent), but remained 1.5 percent lower than a year ago; multi-family starts, by contrast, jumped to 238,000 units (by 48,000 units or 25.3 percent), 145.4 percent above year earlier levels.
 

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New-home sales also advanced in November, by 1.6 percent, to 315,000 (SAAR). The median price of new homes sold dropped by 3.8 percent, however, to $214,100. Because single-unit starts rose more quickly than sales (respectively, 10,000 and 5,000), the three-month average starts-to-sales ratio ticked above 1.4 in November.
 

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Single-unit completions fell by 0.7 percent, and the inventory of new single-family homes shrank in both absolute terms (2,000 units) and months of inventory (0.2 month). Inventory stood at 158,000 units and 6.0 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 better than their new-home counterparts in November, rising by 170,000 units (SAAR) or 4.0 percent. The share of total sales comprised of new homes ticked down by 0.1 percentage point, to 6.7 percent. The impact of the National Association of Realtors’ recent home sales rebenchmarking exercise can be seen in the steep drop in the existing sales index between December 2006 and January 2007 (red line in the graph above).
 

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With the median price of existing homes sold rising by $3,000 (1.9 percent), to $164,100, housing affordability retreated slightly from its record high set in October. This followed on the heels of slight decreases in the not seasonally adjusted 10- and 20-city S&P/Case-Shiller home price indices during October (respectively, -1.1 and -1.2 percent).

“There was weakness in the monthly statistics, as 19 of the cities posted price declines in October over September,” said David Blitzer, chair of the Index Committee at S&P Indices. “Eleven of the cities and both composites fell by 1.0 percent or more during the month. And even though some of the annual rates are improving, 18 cities and both Composites are still negative. Nationally, home prices are still below where they were a year ago. The 10-City Composite is down 3.0 percent and the 20-City is down 3.4 percent compared to October 2010.

“In the October data, the only good news is some improvement in the annual rates of change in home prices, with 14 of 20 cities and both Composites seeing their annual rates of change improve. 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. The 10-City Composite is about 2.4 percent above its relative low, and the 20-City Composite is about 1.9 percent.
 

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“Atlanta and the Midwest are regions that really stand out in terms of recent relative weakness. Atlanta was down 5.0 percent over the month, after having fallen by 5.9 percent in September. It also has the weakest annual return, down 11.7 percent. Chicago, Cleveland Detroit and Minneapolis all posted monthly declines of 1.0 percent or more in October. These markets were some of the strongest during the spring/summer buying season. However, Detroit is the healthiest when viewed on an annual basis. It is up 2.5 percent versus October 2010. Atlanta, Cleveland, Detroit and Las Vegas are four markets where average prices are below their January 2000 levels; and Atlanta and Las Vegas posted new lows in October.

“Some of the other housing statistics posted relatively healthy figures for November, but it seems that most of the good news was confined to the multi-family sector. Existing home sales rose in November, but are still at a low annual rate of about 4.0 million. Single family housing starts also rose, but remain close to record lows and are still down about 1.5 percent versus October 2010.”
 

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December 2011 ISM Reports

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The pace of growth in manufacturing picked up again in December, with the Institute for Supply Management’s (ISM) PMI rising to 53.9 percent, from 52.7 in November (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, “Manufacturing is finishing out the year on a positive note, with new orders, production and employment all growing in December at faster rates than in November, and with an optimistic view toward the beginning of 2012 as reflected by the panel in this month's survey."
 

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The non-manufacturing sector also edged up in December, reflected by a 0.6 percentage point rise (to 52.6 percent) in the non-manufacturing index (now known simply as the “NMI”). "Respondents' comments are mixed and vary by industry and company. Economic growth continues to be slowed by the lag in employment,” concluded Anthony Nieves, chair of ISM’s Non-Manufacturing Business Survey Committee.
 

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The only reported change in Wood Products reflected a slowdown in new orders. Paper Products expanded, the main foreward-looking “negatives” being declines in new export orders and a rise in inventories. Real Estate and Ag & Forestry both reported contraction in overall activity, while Construction expanded.

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

Some respondents reported paying more for fuel while others paid less. The only relevant commodity described as being in short supply was #2 diesel fuel.

November 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 mostly higher in November for the sectors and industries we track.
 

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Shipments, up six consecutive months, increased $0.1 billion to $455.0 billion in November. Durable goods shipments decreased $0.7 billion (0.3 percent) to $202.9 billion, led lower by transportation equipment. Shipments of nondurable goods increased $0.8 billion (0.3 percent) to $252.1 billion, led by petroleum and coal products. Wood and Paper shipments both fell -- by 0.5 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 21.5 percent increase in not-seasonally adjusted rail shipments in November (relative to October), and a 2.3 percent rise from a year earlier. Seasonal adjustments trimmed the 21.5 percent October-to-November increase to a 0.9 percent gain, however. Interestingly, rail shipments of primary forest products were lower in November 2011 than a year earlier.

The PCI, which tracks diesel use for over-the-highway trucking, rose 0.1 percent on a seasonally and workday adjusted basis in November after a 1.1 percent increase in October. Ed Leamer, PCI chief economist said, “The continuing weakness in the PCI is out-of-sync with real retail sales. The year-over-year increase in real retail sales through October was 3.6 percent compared with an increase in the PCI of 1.3 percent. The disconnect between real retail sales and the PCI suggests that retailers have learned to better manage their inventory. Therefore, shoppers can anticipate fewer bargains in the month ahead, and relatively little stock left for the after-Christmas sales.” Leamer added, “With two months of data available, the PCI suggests fourth quarter GDP growth in range of 0.0 to 1.0 percent.”
 

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Inventories increased $2.8 billion (0.5 percent) to $609.8 billion, 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 October. Durable goods inventories increased $2.1 billion (0.6 percent) to $369.0 billion; transportation equipment led the durables inventory increase. Inventories of manufactured nondurable goods increased $0.7 billion (0.3 percent) to $240.8 billion, led by petroleum and coal products.

Forest products inventories were split: Wood rose by 2.1 percent while Paper fell by 0.3 percent.
 

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There appears to be a disconnect between GDP and manufacturing, particularly the ratio of inventories to shipments of durable goods. The graph above shows a negative correlation between quarterly GDP change and the inventories-to-shipments (IS) ratio for durable goods (i.e., quarterly GDP change climbs when the value of shipments comes closer to matching that of inventories, causing the IS ratio to fall, and GDP change drops when the value of shipments is outstripped by that of inventories, causing the IS ratio to rise). Note that the IS ratio is inverted in the above figure to demonstrate that the rebound in GDP growth since 2009 has not been supported by shipments of durable goods to the same degree as before the recession.

It is somewhat unusual for GDP change to run counter to its historical relationship with the IS ratio for consecutive quarters (2Q and 3Q2011), thus -- unless the relationship between GDP and the IS ratio has truly weakened -- we expect a correction to occur soon: either the IS ratio will fall or GDP growth will decline. Since Census Bureau data show the value of durable goods inventories were at an all-time high in November, shipments “have their work cut out for them.”
 

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New orders increased $8.2 billion (1.8 percent) to $459.2 billion in November. Excluding transportation, new orders increased 0.3 percent.

Durable goods orders increased $7.4 billion (3.7 percent) to $207.1 billion, nondurable goods orders increased $0.8 billion (0.3 percent) to $252.1 billion.