4Q2011 Gross Domestic Product: Second (Preliminary) 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 3.0 percent, up from both the previous estimate of 2.8 percent for 4Q and 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.” The changes to 4Q’s estimates were generally of limited statistical significance.
 

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Consumer Metrics Institute (CMI) made the following observations:

-- The contribution to the annualized growth rate for consumer expenditures for goods was revised down slightly to 1.17 percent, which is still up 0.84 percent from the 0.33 percent rate reported for 3Q2011.

-- On the other hand, consumer services were revised modestly upward to 0.35 percent, gaining a quarter of a percent from the 0.10 percent in the "advance" report.

-- The growth rate contribution from private fixed investments was also revised up slightly to 0.53 percent (from 0.41 percent previously), but this remains about 1 percent lower than the 1.52 percent annualized rate reported for 3Q.

-- The contribution from inventories (1.88 percent annualized) is only slightly less than the 1.94 percent reported in the "advance" estimate and it still represents in its own right a +3.23 percent improvement in the headline number compared to 3Q.

-- The reported drag on GDP growth from contracting expenditures by governments at all levels was not meaningfully changed at -0.89 percent (slightly less than the -0.93 percent drag previously reported), remaining -0.87 percent worse than during 3Q2011.

-- The annualized contribution to the growth rate from exports was revised down slightly to 0.59 percent (from 0.64 percent in the "advance" report).

-- Imports are now reported to be removing -0.65 percent from the growth rate of the overall economy, only modestly less than the -0.75 percent previously reported but still a significant deterioration from the -0.21 percent rate reported for the third quarter.

-- The annualized growth rate of "real final sales of domestic product" was revised upward about a third of a percent to 1.10 percent, but it is still substantially below the +3.16 percent reported for 3Q. If this number is accepted at face value (and not as a consequence of deflators playing havoc with inventory valuations) it still indicates a much weaker economy than is conveyed in the headline number.

-- Real per-capita disposable income is now reported to have grown at a miserable 0.59 percent annualized rate during 4Q2011.
 

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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 1.62 percent in 4Q.

December 2011 International Trade

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According to data compiled by the Netherlands Bureau for Economic Policy Analysis, world trade volume increased by 1.4 percent in December from the previous month, following a revised rise of 0,8 percent in November. Regional results were mixed: Emerging economies generally did better than advanced economies; Japanese and Euro Area imports continued to decline.

Over the whole of 2011, trade went up by 5.6 percent (2010 average to 2011 average). Emerging economies again outpaced advanced economies. Earthquake-hit Japan has been struggling to recover. In the Euro Area both imports and exports advanced slowly.

World trade prices rose by 1.6 percent in December and averaged +1.1 percent during 4Q.
 

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Total December exports of $178.8 billion and imports of $227.6 billion resulted in a goods and services deficit of $48.8 billion, up from $47.1 billion in November. December exports were $1.1 billion more than in November, while imports were $3.0 billion higher.
 

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Paper exports more than recouped November’s downturn when jumping by 285,000 tons (9.8 percent) in December; imports ticked down by 18,000 tons (4.3 percent). Exports remained 14,000 tons (0.4 percent) above year-earlier levels, but imports were 29,000 tons (6.9 percent) lower.
 

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Softwood lumber exports fell by 7 MMBF (5.3 percent) in December and imports advanced by 32 MMBF (4.2 percent). Exports were 11 MMBF (9.3 percent) higher than year-earlier levels; imports were 61 MMBF (8.3 percent) higher.

January 2012 Consumer and Producer Price Indices

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The seasonally adjusted Consumer Price Index increased 0.2 percent in January. The not seasonally adjusted all-items index has risen 2.9 percent over the last 12 months, a slight decrease from last month's 3.0 percent figure. The index for energy has risen 6.1 percent over the last year and the food index 4.4 percent; both figures are slight declines from last month. The index for all items less food and energy has risen 2.3 percent, its largest 12-month increase since September 2008.

The seasonally adjusted Producer Price Index for finished goods (PPI) advanced 0.1 percent in January. Prices for finished goods declined 0.1 percent in December and moved up 0.2 percent in November. At the earlier stages of processing, the index for intermediate goods fell 0.4 percent in January, and crude goods prices increased 1.5 percent. On an unadjusted basis, the finished goods index advanced 4.1 percent for the 12 months ended January 2012, the smallest year-over-year rise since a 3.6-percent increase in January 2011.
 

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Details at different stages of processing include:

Finished goods -- The rise in finished goods prices can be attributed to the index for finished goods less foods and energy, which moved up 0.4 percent. By contrast, prices for finished energy goods and for finished consumer foods declined 0.5 percent and 0.3 percent, respectively.

Intermediate goods -- This index moved down 0.4 percent following a 0.2-percent decline in December. Over three-fourths of the broad-based decrease in January is attributable to prices for intermediate energy goods, which fell 1.4 percent. Also contributing to the decline in intermediate goods prices, the index for intermediate goods less foods and energy inched down 0.1 percent, and prices for intermediate foods and feeds decreased 0.4 percent. For the 12 months ended in January, the intermediate goods index rose 4.2 percent, the smallest year-over-year advance since a 2.9-percent increase in December 2009.

Crude goods -- The index for crude goods moved up 1.5 percent. For the three-month period ending in January, crude material prices rose 2.6 percent following a 1.1-percent decline from July to October. In January, nearly half of the broad-based monthly advance is attributable to a 1.6-percent increase in prices for crude energy materials. Also contributing to the January advance, the index for crude foodstuffs and feedstuffs moved up 1.6 percent, and prices for crude nonfood materials less energy rose 0.6 percent.
 

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At the end of 2011 the Bureau of Labor Statistics stopped reporting a couple of data series we have tracked on this blog -- “Softwood logs, bolts and timber” (WPU085101) and “Pulpwood” (WPU085103). We have substituted “Logs, bolts, timber, pulpwood, woodchips and other roundwood products” (WPU085) in the graph above -- simplified as “Wood Fiber.” The individual price indices we track either increased more slowly on a year-over-year basis in January or, in the case of softwood lumber, actually declined. All except softwood lumber were more expensive in January than a year earlier.
 

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January 2012 Industrial Production, Capacity Utilization and Capacity

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Industrial production was unchanged in January, as a gain of 0.7 percent in manufacturing was offset by declines in mining and utilities. Within manufacturing, the index for motor vehicles and parts jumped 6.8 percent and the index for other manufacturing industries increased 0.3 percent. Total industrial production is now reported to have advanced 1.0 percent in December; the initial estimate had been an increase of 0.4 percent. This large upward revision reflected higher output for many manufacturing and mining industries. At 95.9 percent of its 2007 average, total industrial production in January was 3.4 percent above its level of a year earlier. Wood Products output shrank by 1.5 percent but Paper output rose by 0.7 percent.
 

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The capacity utilization rate for total industry decreased to 78.5 percent, a rate 1.8 percentage points below its long-run (1972--2011) average. Changes in Wood Products and Paper capacity utilization were split: respectively, -1.4 and +0.8 percent.
 

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

January 2012 U.S. Treasury Statement and Debt Overview

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Outlays of $261.7 billion and receipts of $234.3 billion added $27.4 billion to the federal budget deficit in January. The federal debt held by the public stood at $15.223 trillion at the end of December.
 

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Foreigners held $4.732 trillion, or 31 percent of the U.S. public debt at the end of December. China remained the largest foreign creditor ($1.101 trillion) despite shedding $31.9 billion (2.8 percent) of Treasuries. The U.K., often considered a proxy for China, also sold $11.1 billion (2.6 percent) in December. Japan was the biggest buyer in both absolute and percentage change terms ($3.5 billion; 0.3 percent).
 

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The Federal Reserve “stood pat” with its holdings of U.S. Treasury securities in December.
 

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Central banks controlled 68 percent of the foreign-held U.S. Treasuries, down from 72 percent a year earlier.
 

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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 $87.1 billion in December; that brought the three-month moving average to $28.9 billion.
 

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Delving into the TIC report details revealed that short-term securities experienced a net outflow of $18.3 billion (bringing the three-month moving average to -$7.1 billion).
 

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Long-term U.S. public debt saw net inflows drop to $10.6 billion (3-month average = $30.3 billion), while private equities saw net outflows of $31.7 billion (3-month average = -$13.9 billion). This begs the question: How could net TIC flows be increasing if the components were all down? The answer appears to lie with the observation that banks’ own net dollar-denominated liabilities to foreign residents increased by $103.8 billion.
 

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Foreigners seem to be wavering in their commitment to hold Treasuries with the Federal Reserve, thereby creating considerable volatility in the monthly change of custodial holdings.
 

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A substantial share of the explanation for why U.S. interest rates fell to their current low levels came from foreign investors’ willingness to buy and hold U.S. Treasuries. (Note that the monthly change axis in the graph above is inverted to better show its correlation with the 10-year Treasury rate.) Rates could rise if those investors get “cold feet” and park more of their funds in other vehicles.

February 2012 Macro Pulse -- The Good, the Bad, and the Perplexing

At least as far as the U.S. economy was concerned, data release headlines during the past month were, by and large, reasonably positive. More pessimistic information often emerged upon closer inspection, however. And then there were some real head-scratchers. Examples of each include….

Click here to read the entire February 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.

December 2011 U.S. Construction

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Overall construction spending in the United States increased by 1.5 percent during December, to a seasonally adjusted and annualized rate (SAAR) of $816.4 billion. All categories posted increases; the private non-residential category exhibited the largest advance in both absolute and percentage terms (respectively, $9.1 billion and 3.3 percent).
 

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Despite the increase in residential construction spending, total housing starts fell by 4.1 percent in December, to 657,000 units (SAAR) – nearly 25 percent over year-earlier levels, but still more than 71 percent below the January 2006 peak. Single-family starts rose to 470,000 units (by +20,000 units or 4.4 percent); multi-family starts, by contrast, dropped to 187,000 units (by -48,000 units or 20.4 percent), 37.4 percent above year earlier levels.
 

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New-home sales retreated in December, by 2.2 percent, to 307,000 (SAAR). The median price of new homes sold dropped by 2.5 percent, to $210,300. Because single-unit starts rose while sales fell (respectively, 20,000 and -7,000), the three-month average starts-to-sales ratio jumped almost to 1.5 in December.
 

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Single-unit completions fell by 0.9 percent; the inventory of new single-family homes shrank in absolute terms (1,000 units) but expanded in months of inventory (0.1 month). Inventory stood at 157,000 units and 6.1 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 December, rising by 220,000 units (SAAR) or 5.0 percent. The share of total sales comprised of new homes ticked down by 0.5 percentage point, to 6.2 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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Although the median price of existing homes sold rose by $1,100 (0.7 percent), to $165,100, housing affordability crept higher. This followed on the heels of decreases in the not seasonally adjusted 10- and 20-city S&P/Case-Shiller home price indices during October (both -1.3 percent).

“Despite continued low interest rates and better real GDP growth in the fourth quarter, home prices continue to fall. Weakness was seen as 19 of 20 cities saw average home prices decline in November over October,” said David Blitzer, chair of the Index Committee at S&P Indices. “The only positive for the month was Phoenix, one of the hardest hit in recent years. Annual rates were little better as 18 cities and both Composites were negative. Nationally, home prices are lower than a year ago. The 10-City Composite was down 3.6 percent and the 20-City was down 3.7 percent compared to November 2010. The trend is down and there are few, if any, signs in the numbers that a turning point is close at hand.
 

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“The crisis low for the 10-City Composite was April 2009; for the 20-City Composite the more recent low was March 2011. The 10-City Composite is now about 1.0 percent above its low, and the 20-City Composite is only 0.6 percent above its low. From their 2006 peaks, both Composites are down close to 33 percent through November.

“Atlanta continues to stand out in terms of recent relative weakness. It was down 2.5 percent over the month, after having fallen by 5.0 percent in October, 5.9 percent in September and 2.4 percent in August. It also posted the weakest annual return, down 11.8 percent. In addition, Atlanta, Las Vegas, Seattle and Tampa all reached new lows in November.”
 

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

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Bureau of Economic Analysis data showed that personal income increased $61.3 billion (0.5 percent), and disposable personal income (DPI) increased $47.1 billion (0.4 percent) in December. Personal consumption expenditures (PCE) decreased $2.0 billion, or less than 0.1 percent. Real (inflation-adjusted) DPI increased 0.3 percent while real PCE decreased 0.1 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 ticked back up to 4.0 percent in December, but the downward trend remains intact.
 

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Consumers bumped up spending by 0.1 percent on retail goods in December, but gains were concentrated in the vehicle and food service sectors as the “other” category fell by 0.3 percent.
 

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Total consumer debt outstanding increased substantially again in December, rising by a seasonally adjusted $19.3 billion (9.4 percent annualized). Revolving (mostly credit card) debt rose by $2.8 billion (4.1 percent annualized), while non-revolving debt (mainly student and auto loans) increased $16.6 billion (11.8 percent annualized). Student loans comprised over 64 percent of the gain in the non-revolving loan category.

January 2012 Employment Report

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According to the Bureau of Labor Statistics (BLS) non-farm payroll employment rose by 243,000 in January, and the unemployment rate decreased to 8.3 percent. January’s private-sector job growth was widespread and amounted to +257,000, while government employment shrank by 14,000 (mostly at the local level). The change in total nonfarm payroll employment for November was revised from +100,000 to +157,000, and the change for December was revised from +200,000 to +203,000. Monthly revisions result from additional sample reports and the monthly recalculation of seasonal factors. The BLS’s annual benchmark process also contributed to these revisions.
 

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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 5.6 million fewer jobs than at the beginning of the 2007 recession.
 

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A substantial proportion of the reason for why the unemployment rate fell by 0.2 percentage points can be attributed to the observation that the number of persons not in the labor force exploded by a record 1.2 million in January. 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 (the share of the population 16 years and older working or seeking work) collapsed to 63.7 percent, the lowest value since May 1983. At the same time, the annual percentage increase in average hourly earnings of production and non-supervisory employees slumped to 1.5 percent, a record low stretching back to when such data began to be collected in 1964. With the price index for urban consumers rising at a 3.0 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, full-time employment increased by 80,000; however, part-time employment rose by 132,000. Nonetheless, 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 appears quite positive at first glance, but closer examination reveals serious flaws.

December 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 in December for the sectors and industries we track.
 

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Shipments increased for a seventh consecutive month, by $3.4 billion (0.7 percent) to $459.4 billion. Durable goods shipments increased $4.4 billion (2.2 percent) to $207.5 billion, led by primary metals. Shipments of nondurable goods decreased $1.0 billion (0.4 percent) to $251.9 billion, driven lower by petroleum and coal products. Wood shipments fell by 1.5 percent while Paper rose by 0.3 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 decrease in not-seasonally adjusted rail shipments in December (relative to November), and a 7.3 percent rise from a year earlier. Seasonal adjustments converted the 23.2 percent November-to-December decrease to a 1.8 percent gain, however. Rail shipments of all forest-related products were higher in December 2011 than a year earlier.

The PCI, which tracks diesel use for over-the-highway trucking, rose 0.2 percent on a seasonally and workday adjusted basis in December after a 0.1 percent increase in November. “Many Wall Street economists have jacked up their ‘backcasts’ for fourth quarter GDP growth to 3 percent but the PCI does not support this view,” said Ed Leamer, PCI chief economist, prior to the GDP release. “The PCI measures inventories destined for factories, stores and homes, and the decline in the PCI in the third quarter correctly anticipated the large negative contribution of inventories to GDP growth.” With all three months of the fourth quarter now available, the PCI suggested 4Q GDP growth of 2.0 percent or less. As indicated in our GDP blog post, however, the Bureau of Economic Analysis (BEA) estimated 4Q2011 real GDP growth at 2.8 percent -- quite close to the 3 percent figure Leamer mentioned. We expect the BEA’s estimate to be revised lower during upcoming months.

“With real retail sales growing more rapidly than the PCI over the last two quarters, however, the first half of 2012 may be an inventory-rebuilding period, allowing inventories to make a substantial contribution to GDP growth,” Leamer concluded.
 

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Inventories, up 26 of the last 27 months, increased $0.4 billion (0.1 percent) to $610.1 billion -- the highest level since the series was first published on a NAICS basis in 1992. The inventories-to-shipments (IS) ratio was 1.33, down from 1.34 in November. Durable goods inventories increased $1.1 billion (0.3 percent) to $370.0 billion, led by transportation equipment. Inventories of nondurable goods decreased $0.7 billion (0.3 percent), dragged lower by chemical products.

Forest products inventories shrank: Wood by 0.2 percent and 0.8 percent for Paper.
 

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We had expected either the durable-goods IS ratio to fall or GDP growth to falter. There had been an apparent disconnect between those two metrics since 1Q2011. The graph above shows a negative correlation between quarterly GDP change and the durable-goods IS ratio (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 exceeds 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 we had been awaiting a correction: either for the IS ratio to fall or GDP growth to decline. With the IS ratio falling in December, it appears the two metrics may again be tending toward moving somewhat in tandem.
 

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New orders, up two consecutive months, increased $5.3 billion (1.1 percent) to $466.2 billion. This followed a 2.2 percent November increase. Excluding transportation, new orders increased 0.6 percent. Durable goods orders increased $6.3 billion (3.0 percent) to $214.3 billion, led by transportation equipment. New orders for nondurable goods decreased $1.0 billion (0.4 percent) to $251.9 billion.