4Q2011 Gross Domestic Product: Third (Final) 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, essentially unchanged from the previous 4Q revision, but higher than 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 (CMI) summarized the GDP report as follows:

-- The headline number of 2.97 percent is certainly decent, and in the same historical "ball-park" context of pre-recession 4Q2006 (2.75 percent), some five years ago. The components of the current number, however, are significantly skewed relative to the historic reference:

-- In 4Q2006 both consumer goods and consumer services were growing at roughly comparable rates (which we might normally expect, should the growth be fueled by fatter wallets), and between them they contributed enough growth to nearly account for the entire headline number. That was certainly not true five years later.

-- In 4Q2006 "real" per capita disposable income was growing at a 4.28 percent annualized rate. That number dropped to a miserable 0.96 percent rate in 4Q2011, after actually going negative (i.e., contracting) in both 2&3Q2011.

-- The current dichotomy between consumer goods and services is likely telling us something about relatively inelastic demand for certain consumer goods (e.g., energy and food) even in the face of rising prices. If per-capita disposable income is tightly constrained any impact of rising food and energy prices will show up as decreased demand or softer prices (or both) in consumer services. This would cause the relative growth rates for goods and services to decouple in much the manner we are now observing.

-- In 2006 both exports and imports were adding positive contributions to the headline number, with exports alone contributing the equivalent of two-thirds of the headline. By the same quarter in 2011 the combined contributions from exports and imports had dropped from a positive 1.94 percent contribution to a -0.26 percent drag on the headline number.

-- In 2006 governments at all levels were contributing a modest 0.22 percent to the headline number. That number grew (under stimulus) to +1.21 percent in 2Q2009. But by 4Q2011 sharply contracting governments were sucking -0.84 percent from that headline number, a trend that is not likely to reverse anytime soon.

-- During 4Q2006 "real final sales" was growing at a robust 3.82 percent. Five years later that number was a relatively weak 1.16 percent.
 

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The 4Q GDP revision leaves the recession call made by Federal Reserve analyst Jeremy Nalewaik 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.

January 2012 International Trade

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According to data compiled by the Netherlands Bureau for Economic Policy Analysis, world trade volume increased by 0.9% in January from the previous month, following a revised rise of also 0,9% in December. Imports expanded strongly in most advanced and emerging economies, most notably in Japan. In Emerging Asia imports declined however. Euro Area imports grew for the first time since August. In the preliminary estimates, export growth appears to have been rather lower than import growth, a statistical oddity (and the reversal of the December pattern). Regional differences are also more marked at the export side, with strong figures for the United States and Japan, a decline in Emerging Asia, and a continued decline in the Euro Area.

World trade prices rose by 0.3 percent in January after a downwardly revised decline of 1.0 percent in December.
 

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Total January exports of $180.8 billion and imports of $233.4 billion resulted in a goods and services deficit of $52.6 billion, up from $50.4 billion in December, the largest deficit since October 2008. January exports were $2.6 billion more than in December, while imports were $4.7 billion higher.
 

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Paper exports started the year off in negative territory, dropping by 19,000 tons (0.7 percent). However, imports fell by an even wider margin: -33,000 tons (4.3 percent). Exports were 78,000 tons (3.0 percent) higher than a year earlier, however, while imports were 99,000 tons (11.8 percent lower).
 

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Softwood lumber exports rose by 1 MMBF (0.7 percent) in January but imports retreated by 119 MMBF (14.9 percent). Exports were 12 MMBF (10.1 percent) higher than year-earlier levels; imports were 20 MMBF (2.9 percent) lower.

February 2012 Consumer and Producer Price Indices

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The seasonally adjusted Consumer Price Index increased 0.4 percent in February. The not seasonally adjusted all-items index has risen 2.9 percent over the last 12 months. The gasoline index rose sharply in February, accounting for over 80 percent of the change in the all items index.

The seasonally adjusted Producer Price Index for finished goods (PPI) advanced 0.4 percent in February. At earlier stages of processing, the index for intermediate goods moved up 0.7 percent and crude goods prices increased 0.4 percent. On an unadjusted basis, the finished goods index rose 3.3 percent for the 12 months ended February 2012, the smallest year-over-year rise since a similar 3.3-percent advance in August 2010.
 

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Details at different stages of processing include:

Finished goods -- The rise in finished goods prices was led by the index for finished energy goods, which moved up 1.3 percent. Prices for finished goods less foods and energy rose 0.2 percent. By contrast, the finished consumer foods index edged down 0.1 percent.

Intermediate goods -- This index moved up 0.7 percent in February following a 0.4-percent decline in January. Most of this advance can be attributed to higher prices for intermediate materials less foods and energy, which climbed 1.0 percent. The index for intermediate energy goods rose 0.3 percent. By contrast, prices for intermediate foods and feeds edged down 0.1 percent. For the 12 months ended in February, the intermediate goods index advanced 3.3 percent, the smallest year-over-year increase since a 2.9-percent rise in December 2009.

Crude goods -- The index for crude goods advanced 0.4 percent in February. For the 3 months ending in February, crude goods prices moved up 0.4 percent compared with a 2.3-percent increase for the 3 months ending in November. On a monthly basis, the February index for crude foodstuffs and feedstuffs climbed 0.6 percent, and prices for crude energy materials moved up 0.3 percent. By contrast, the index for crude nonfood materials less energy declined 0.3 percent.
 

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At the end of 2011 the Bureau of Labor Statistics stopped reporting a couple of data series we 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 rates of change in the individual price indices we track were mixed on a year-over-year basis in February. Nonetheless, all except softwood lumber were more expensive in January than a year earlier.
 

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February 2012 Industrial Production, Capacity Utilization and Capacity

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Industrial production was unchanged in February after having risen 0.4 percent in January. Previously, industrial production was reported to have been unchanged in January. Manufacturing output moved up 0.3 percent in February. At 96.2 percent of its 2007 average, total industrial production for February was 4.0 percent above its year-earlier level. Wood Products output rose by 0.1 percent, and Paper output rose by 0.7 percent.
 

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Capacity utilization for total industry edged down to 78.7 percent, a rate 2.2 percentage points (2.8 percent) above its level from a year earlier but 1.6 percentage points below its long-run (1972–2011) average. Wood Products and Paper both rose: respectively, 0.3 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: respectively, by 0.2 and 0.1 percent.

February 2012 U.S. Treasury Statement and Debt Overview

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The United States’ public debt stood at $15.223 trillion as of the end 2011, up from $14.025 trillion at the end of 2010 and more than double the level of a decade earlier. As can be seen from the charts above and below, nearly 89 percent of that debt was held by federal intra-governmental holding accounts (over half of which was comprised of the Federal Old-Age and Survivors Insurance Trust Fund, a.k.a., Social Security), and foreign and domestic investors of various types. The Federal Reserve held the remaining 10.8 percent. China, Japan and the OPEC countries were the three largest foreign holders of U.S. debt.

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The sea change in the distribution of U.S. public debt purchases among investor types that began in 1Q2011 continued in 4Q2011: Domestic private investors, and state and local governments remained on the sidelines. The Federal Reserve. with its purchases of $548 billion (55 percent of the total 2011 incremental change), and foreign and international investors bought up most of the new debt.
 

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The fiscal picture has continued to worsen since December. Indeed, the red ink deepened again in February 2012 as outlays of $335.1 billion and receipts of $103.4 billion added another $231.7 billion to the federal budget deficit. The total public debt outstanding grew to $15.489 trillion by the end of February.
 

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U.S. treasury purchases by foreign investors have been gradually rising, finally breaching the $5 trillion mark in January. All six of the largest holders were net buyers in January. China remained the largest foreign creditor with$1.160 trillion.
 

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The Federal Reserve has surpassed China in terms of U.S. Treasury holdings ($1.638 trillion). Interestingly, the Fed was a net seller of Treasuries in January.
 

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Evidence of somewhat stronger foreign interest in U.S. debt comes from the Treasury International Capital (TIC) accounting system. Three-month-average flows climbed to $42.4 billion in January. Essentially all of the inflows occurred in long-term public securities.
 

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We continue to monitor the contribution to GDP of each new dollar of total credit market debt. Although that contribution is still positive, it is well off the peak of 3Q2011 and appears to be returning to the 50-year trend of declining contributions.

March 2012 Macro Pulse -- Navigating with Foggy Data

Before the advent of modern technology, ships navigating in shallow water during foggy conditions had to rely on depth sounding with poles or weights attached to knotted lines to avoid sand bars and other obstacles. Progress was painfully slow as a result. Applying this analogy to today’s economic realm, determining the true state of the economy and whether it is in danger of running aground can be difficult in the best of times. The challenge is greatly compounded when the data are inconsistent, as is the case at present.

For example, the “rear-view mirror” perspective provided by 4Q2011 GDP is a bit rosier thanks to the upward revision to 3.0 percent growth. Moreover, the Federal Reserve’s latest Beige Book suggests “overall economic activity continued to increase at a modest to moderate pace in January and early February.” More recent data, however, have been less positive. Some of the other conflicting data include….

Click here to read the entire March 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.

February 2012 Employment Report

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According to the Bureau of Labor Statistics (BLS) non-farm payroll employment rose by 227,000 in February, and the unemployment rate was unchanged at 8.3 percent. February’s private-sector job growth was widespread and amounted to +233,000 among professional and businesses services, health care and social assistance, leisure and hospitality, manufacturing, and mining; government employment shrank by 6,000 (mostly at the federal level). The change in total nonfarm payroll employment for December was revised from +203,000 to +223,000, and the change for January was revised from +243,000 to +284,000.
 

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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 5.3 million fewer jobs than at the beginning of the 2007 recession, a level previously seen in February 2009 and February 2005.
 

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The number of people not in the labor force dropped by 310,000 in February, after jumping by 1.177 million in January (that jump was likely due in large part to BLS rebenchmarking activities). Although the ratio of employed persons to the entire population is at its highest since May 2010 (0.586), the trend remains mildly negative (i.e., employment growth is still lagging behind population growth).
 

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The civilian labor force participation rate (the share of the population 16 years and older working or seeking work) bounced off of January’s low of 63.7 percent (the lowest value since May 1983) while rising to 63.9 percent in February. At the same time, the annual percentage increase in average hourly earnings of production and non-supervisory employees ticked higher, to 1.6 percent (0.15 percentage point higher than January’s 1.45 percent, which was 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 2.9 percent annual pace, wages are falling in real terms (i.e., wage increases are not keeping up with price inflation).
 

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Full-time employment increased by 563,000 at the same time part-time employment fell by 111,000. The declining trend for part-time employment appears to be strengthening; so, too, is the upward trend in full-time employment (especially if viewed from January 2010).

Taken at face value, this employment report appears quite positive.

January 2012 Personal Income and Outlays, Retail Sales and Consumer Debt

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Bureau of Economic Analysis data showed that personal income increased $37.4 billion (0.3 percent), and disposable personal income (DPI) increased $14.1 billion (0.1 percent) in January. Personal consumption expenditures (PCE) increased $23.2 billion (0.2 percent). Real (inflation-adjusted) DPI decreased 0.1 percent while real PCE increased less than 0.1 percent.
 

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Consumers bumped up spending on retail goods in January by a seasonally adjusted 0.4 percent, with gains concentrated in the “other” and food service sectors; the vehicle category fell by 1.1 percent. Interestingly, January’s retail sales rise appears to have been largely a result of the Census Bureau’s seasonal adjustments, since unadjusted sales plunged from $459.8 billion in December to $361.4 billion in January, or -$98.5 billion in one month -- the biggest one month drop in retail sales in history.
 

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Total consumer debt outstanding increased substantially again in December, rising by a seasonally adjusted $17.8 billion (8.6 percent annualized). Revolving (mostly credit card) debt fell by $2.9 billion (4.4 percent annualized), while non-revolving debt (mainly student and auto loans) shot up by $20.7 billion (14.7 percent annualized). Student loans comprised almost 85 percent of the gain in the non-revolving loan category.

January 2012 U.S. Construction

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Overall construction spending in the United States decreased by 0.1 percent during January, to a seasonally adjusted and annualized rate (SAAR) of $827.0 billion. Only the private residential category posted an increase relative to December ($4.4 billion and 1.8 percent).
 

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Total housing starts rose by 1.5 percent in January, to 699,000 units (SAAR). Single-family starts fell to 508,000 units (by -5,000 units or 1.0 percent); multi-family starts, by contrast, rose to 191,000 units (by +15,000 units or 8.5 percent), 4.0 percent below year earlier levels.
 

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New-home sales retreated in January, by 0.9 percent, to 321,000 (SAAR). The median price of new homes sold rose by 0.3 percent, to $217,100. Although single-unit starts fell more quickly than sales (respectively, -5,000 and -3,000), the three-month average starts-to-sales ratio jumped almost to 1.6 in January.
 

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Single-unit completions fell by 14.9 percent; the inventory of new single-family homes shrank in both absolute terms (-3,000 units) and months of inventory (0.1 month). Inventory stood at 151,000 units and 5.6 months. As has repeatedly been the case since March 2011, 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 January, rising by 190,000 units (SAAR) or 4.3 percent. The share of total sales comprised of new homes ticked down by 0.3 percentage point, to 6.6 percent.
 

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Because the median price of existing homes sold fell by $8,200 (5.0 percent), to $154,400, housing affordability jumped to a new all-time high. This followed on the heels of decreases in the not seasonally adjusted 10- and 20-city S&P/Case-Shiller home price indices during December (both -1.1 percent).

“In terms of prices, the housing market ended 2011 on a very disappointing note,” said David Blitzer, chair of the Index Committee at S&P Indices. “With this month’s report we saw all three composite hit new record lows. While we thought we saw some signs of stabilization in the middle of 2011, it appears that neither the economy nor consumer confidence was strong enough to move the market in a positive direction as the year ended.
 

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“After a prior three years of accelerated decline, the past two years has been a story of a housing market that is bottoming out but has not yet stabilized. Up until today’s report we had believed the crisis lows for the composites were behind us, with the 10-City Composite originally hitting a low in April 2009 and the 20-City Composite in March 2011. Now it looks like neither was the case, as both hit new record lows in December 2011. The National Composite fell by 3.8 percent in the fourth quarter alone, and is down 33.8 percent from its 2nd quarter 2006 peak. It also recorded a new record low.

“In general, most of the regions also posted weak data in December. Eighteen of the cities saw average home prices fall in December over November. Seventeen of the cities have seen monthly declines for at least three consecutive months. In addition to both monthly composites, 10 of the cities saw home prices fall by more than 1.0 percent during the month of December. The pick-up in the economy has simply not been strong enough to keep home prices stabilized. If anything it looks like we might have reentered a period of decline as we begin 2012.”
 

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January 2012 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 January for the sectors and industries we track.
 

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Shipments increased for an eighth consecutive month, by $4.1 billion (0.9 percent) to $463.6 billion. Durable goods shipments increased $0.8 billion (0.4 percent) to $208.0 billion, led by transportation equipment. Shipments of nondurable goods increased $3.3 billion (1.3 percent) to $255.7 billion, led by petroleum and coal products. Wood shipments jumped by 4.1 percent while Paper retreated by 0.6 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 0.9 percent increase in not-seasonally adjusted rail shipments in January (relative to December), and a 0.1 percent rise from a year earlier. Seasonal adjustments converted the 0.9 percent December-to-January increase to a 1.8 percent drop, however. Rail shipments of forest-related products were higher on average in January than a year earlier, although all of the gain was concentrated in the Lumber & Wood Products category.

The PCI, which tracks diesel use for over-the-highway trucking, fell 1.7 percent on a seasonally and workday adjusted basis in January -- compounding the 0.4 percent decrease in December. “It seems difficult to square the behavior of the PCI with the evident improvement in a number of economic indicators, most notably the increase in payroll jobs and the decrease in initial claims for unemployment,” said Ed Leamer, PCI chief economist. “The PCI also seems out-of-sync with Industrial Production and with Real Retail Sales, which continue to grow in a healthy manner while the PCI is stalled out.”

The PCI’s drop is at least somewhat confirmed by the American Trucking Associations’ (ATA) advanced seasonally adjusted For-Hire Truck Tonnage Index, which fell 4.0 percent in January after surging 6.4 percent in December 2011. “Last month I said I was surprised by the size of the gain in December. Today, I’m not surprised that tonnage fell on a seasonally adjusted basis in January simply due to the fact that December was so strong,” said Bob Costello, ATA chief economist. Costello noted that December’s increase was the largest month-to-month gain since January 2005.
 

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Inventories, up 27 of the last 28 months, increased $3.9 billion (0.6 percent) to $614.7 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 December.

Durable goods inventories in January increased $2.4 billion (0.6 percent) to $372.5 billion, led by machinery. Inventories of nondurable goods, increased $1.5 billion (0.6 percent) to $242.2 billion, led by petroleum and coal products. Wood inventories shrank by 1.3 percent while Paper expanded 0.4 percent.

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We had been expecting either the durable-goods inventory-to-shipments (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 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 we had been awaiting a correction: either for the IS ratio to fall or GDP growth to decline. Although the IS ratio fell in December, we would have expected a larger drop if the two metrics were truly moving in tandem once again.
 

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New orders for manufactured goods decreased $4.8 billion (1.0 percent) to $462.6 billion. Excluding transportation, new orders decreased 0.3 percent. Durable goods order decreased $8.0 billion (3.7 percent) to $206.9 billion, led by machinery. By contrast, new orders for nondurable goods increased $3.3 billion (1.3 percent) to $255.7 billion.