3Q2012 Gross Domestic Product: Second (Preliminary) Estimate

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The Bureau of Economic Analysis (BEA) estimated 3Q2012 growth in real U.S. gross domestic product (GDP) at a seasonally adjusted and annualized rate of 2.7 percent, an upward revision of 0.65 percentage point from the previous 3Q estimate, and 1.4 percentage points higher than the current 2Q estimate. Personal consumption expenditures (PCE), private domestic investment (PDI), government consumption expenditures (GCE) and net exports (NetX) contributed to 3Q growth, in that order.
 

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Consumer Metrics Institute (CMI) provided considerable commentary about the GDP report, some of which is reproduced below:

This report's headline number substantially misrepresents the state of the domestic economy, particularly the consumer portion of that economy. Removing the impact of the federal spending surge, growing inventories and exports [eliminates] nearly two-thirds of the apparent growth. If that remaining growth is then deflated using BLS inflation data, the consumer portion of the economy is actually shrinking at an annualized rate in excess of -1.0 percent.

Recapping the issues that merit caution moving forward:

* About 27 percent of the headline growth rate came from a $31 billion surge in federal spending, probably from advance contracting in anticipation of the "fiscal cliff" (and/or a conscious effort to provide a purely executive "stealth stimulus" to the economy).

* Inventories are once again reported to be growing, with 29 percent of the headline growth rate coming from such growth. Over time inventory growth is a nearly zero-sum game, and that apparent growth will need to be paid back in coming quarters.

* The accelerating contraction of per-capita disposable income means that households are under sustained pressure. Any growth in consumer spending is not coming from fatter paychecks -- it is coming instead from other sources, including refinancing, strategic defaults, reduced personal savings (which shrank by $24.4 billion during the quarter) and increased student loans.

We agree with CMI that “We would like to think that the economy is indeed growing at nearly 3 percent -- which by all rights it should be nearly four years into a purported ‘recovery.’ Unfortunately, the underlying reality (especially for U.S. consumers and wage earners) seems to point in a different direction.”


The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

September 2012 International Trade

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Total September exports of $187.0 billion and imports of $228.5 billion resulted in a goods and services deficit of $41.5 billion, down from $43.8 billion in August. September exports were $5.6 billion more than August exports of $181.4 billion, while imports were $3.4 billion more than August imports of $225.2 billion.
 

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Paper exports advanced slightly, rising by 7,000 tons (0.3 percent). By contrast, imports decreased by 138,000 tons (16.5 percent). Exports were 236,000 tons (8.9 percent) lower than a year earlier while imports were 151,000 tons (17.7 percent) lower.
 

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Softwood lumber exports dropped by 16 MMBF (12.4 percent) in September while imports fell by 81 MMBF (9.1 percent). Exports were 19 MMBF (14.7 percent) lower than year-earlier levels; imports were 2 MMBF (0.2 percent) lower.
 

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Taking a broader view, data compiled by the Netherlands Bureau for Economic Policy Analysis showed that world trade volume edged down by 0.4 percent in August at the same time prices rose by 1.5 percent.


The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

October 2012 Consumer and Producer Price Indices

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The seasonally adjusted Consumer Price Index increased 0.1 percent in October. Over the last 12 months, the all items index increased 2.2 percent before seasonal adjustment.

The shelter index increased 0.3 percent, its largest increase since March 2008, and accounted for over half of the seasonally adjusted all items increase. The index for all items less food and energy rose 0.2 percent, as the rise in the shelter index and increases in the indexes for apparel and airline fare more than offset declines in the indexes for used cars and trucks, new vehicles, and recreation.

The food index increased 0.2 percent in October with the index for food at home rising 0.3 percent, its largest increase since September 2011. The energy index, which had risen sharply in August and September, declined slightly in October. Major energy component indexes were mixed, with declines in the indexes for gasoline and natural gas more than offsetting increases in the indexes for electricity and fuel oil.

The 12-month change in the index for all items was 2.2 percent in October, an increase from the September figure of 2.0 percent. The 12-month change in the index for all items less food and energy remained at 2.0 percent. The food index rose 1.7 percent over the last 12 months, and the energy index increased 4.0 percent.

The seasonally adjusted Producer Price Index for finished goods (PPI) declined 0.2 percent in October. Prices for finished goods increased 1.1 percent in September and 1.7 percent in August. At the earlier stages of processing, prices received by manufacturers of intermediate goods edged down 0.1 percent in October, and the crude goods index moved up 0.9 percent. On an unadjusted basis, the finished goods index advanced 2.3 percent for the 12 months ended October 2012, the largest rise since a 2.8-percent increase for the 12 months ended March 2012.
 

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Prices of Pulp, Paper & Allied Products and Wood Fiber are higher than they were a year earlier, while the other categories are lower.
 

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The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

October 2012 Industrial Production, Capacity Utilization and Capacity

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Industrial production declined 0.4 percent in October after having increased 0.2 percent in September. Hurricane Sandy, which held down production in the Northeast region at the end of October, is estimated by the Federal Reserve to have reduced the rate of change in total output by nearly 1 percentage point. The largest estimated storm-related effects included reductions in the output of utilities, of chemicals, of food, of transportation equipment, and of computers and electronic products. In October, the index for manufacturing decreased 0.9 percent; excluding storm-related effects, factory output was roughly unchanged from September. At 96.6 percent of its 2007 average, total industrial production in October was 1.7 percent above its year-earlier level. Industrial production of Wood Products increased by 0.1 percent, but Paper fell by 1.2 percent.
 

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Because the storm made landfall only on the night of October 29, blaming Hurricane Sandy for most of the downturn in industrial production seems a bit suspect to us. Certainly preparations were being made well in advance of landfall, and those preparations covered a wide geographic area because of uncertainty over the storm’s path. Still, it seems to us that estimates of the storm’s impact on industrial production for October are overdone.
 

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Capacity utilization for total industry decreased 0.4 percentage point to 77.8 percent, a rate 2.5 percentage points below its long-run (1972--2011) average. Capacity utilization rose by 0.3 percent for Wood Products but fell by 1.0 percent for Paper.
 

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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 0.2 percent.


The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

November 2012 Macro Pulse -- Déjà vu All over Again?

Baseball legend Yogi Berra coined the phrase "It's déjà vu all over again" when witnessing Yankees players Mickey Mantle and Roger Maris repeatedly hit back-to-back home runs during seasons in the early 1960s. After the elections this month, it also feels like déjà vu all over again on the political front. Little changed, as President Obama was reelected, Republicans retained their majority in the House of Representatives while Democrats did the same in the Senate. Perhaps because the markets were “holding their breath” waiting for the election outcomes, much of the economic data released during October and early November also merely extended existing trends. For example….

Click here to read the entire November 2012 Macro Pulse recap.


The Macro Pulse blog is a commentary about recent economic developments affecting the forest products industry. The monthly Macro Pulse newsletter summarizes the previous 30 days of commentary available on this website.

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

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Bureau of Economic Analysis data showed that personal income increased $48.1 billion (0.4 percent) and disposable personal income (DPI) increased $43.0 billion (0.4 percent) in September. Concurrently, personal consumption expenditures (PCE) increased $87.9 billion (0.8 percent). Real (inflation-adjusted) DPI decreased less than 0.1 percent while real PCE increased 0.4 percent.
 

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Although aggregate personal income continues to set new highs on a nominal basis, in inflation-adjusted terms it is just on par with the May 2008 peak. Taking population growth into account makes the picture even gloomier; per-capita real personal income has recouped less than 60 percent of the prior peak-to-trough loss. Moreover, it appears real income metrics have stalled and may be rolling over again. The purchasing power consumers “feel” with their pocketbooks is most closely related to the per-capita RPI line.
 

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The Census Bureau reported that consumers increased spending on retail goods during September (by 1.1 percent, seasonally adjusted). Americans bought everything from back-to-school supplies to new autos to the latest version of the iPhone. Sales ostensibly advanced in every retail segment except department stores. We say “ostensibly” because seasonal adjustments appear to be entirely responsible for the uptick in sales. On an unadjusted basis, sales declined in every kind of business between August and September.
 

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Total consumer debt outstanding rose by a seasonally adjusted $11.4 billion (5.0 percent annualized) in September. Revolving (mostly credit card) debt increased by $2.9 billion (4.1 percent annualized), while non-revolving debt (mainly student and auto loans) increased by $14.3 billion (9.2 percent annualized). Federal student loans comprised more than two-thirds of the increase in non-revolving debt.
 

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The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

September 2012 Manufacturers’ Shipments, Inventories and New Orders

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According to the U.S. Census Bureau, the value of manufactured-goods shipments increased $4.1 billion (0.9 percent) to $481.3 billion. Durable goods shipments increased $1.7 billion (0.8 percent) to $224.1 billion, led by transportation equipment.

Shipments of nondurable goods increased $2.4 billion (1.0 percent) to $257.2 billion; petroleum and coal products drove the increase. Forest products shipments declined by 1.3 percent (Wood) and 0.4 percent (Paper).
 

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Data from the Association of American Railroads (AAR) and the American Trucking Associations’ (ATA) advance seasonally adjusted For-Hire Truck Tonnage Index help round out the picture on goods shipments. AAR reported a 21.2 percent decrease in not-seasonally adjusted rail shipments in September (relative to August), and a 3.7 percent drop from a year earlier. Excluding coal carloads, year-over-years shipments were up 3.4 percent. Seasonal adjustments mitigated the 21.2 percent August-to-September decrease, shrinking it to a 0.7 percent decrease. Rail shipments of forest-related products were higher in September than a year earlier, thanks exclusively to a 9 percent jump in lumber and wood products shipments. The ATA’s advance index showed a 0.4 percent expansion in September.
 

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Inventories increased $3.7 billion (0.6 percent) to $615.7 billion in September, the highest level since the series was first published on a NAICS basis in 1992. The inventories-to-shipments ratio was 1.28, unchanged from August.

Durable goods inventories increased $0.9 billion (0.3 percent) to $372.9 billion, led by transportation equipment. Inventories nondurable goods increased $2.8 billion (1.2 percent) to $242.8 billion; petroleum and coal products. Wood and Paper inventories were split: Wood rose by 0.9 while Paper fell by 0.8 percent.
 

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New orders for manufactured goods increased $22.0 billion (4.8 percent) to $475.4 billion. Excluding transportation, new orders increased 1.4 percent.

Durable goods orders increased $19.5 billion (9.8 percent) to $218.2 billion, led by transportation equipment. New orders for nondurable goods increased $2.4 billion (1.0 percent) to $257.2 billion. New orders for core capital goods, excluding aircraft, edged up by a seasonally adjusted 0.2 percent in September.

While the Census Bureau’s estimates of new orders for manufactured goods in early 2012 recovered nearly to their previous peak in nominal terms, converting to real, inflation-adjusted terms reveals a quite different story. On that basis, new orders recouped only about half of the loss incurred since December 2007. More worrisome for the future is the observation that new orders are trending lower in both nominal and real terms, thanks in large part to slowing export markets.


The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

October 2012 ISM Reports

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Manufacturing expanded at a slightly faster rate in October, with the Institute for Supply Management’s (ISM) PMI edging up to 51.7 percent -- from 51.5 percent 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, concluded with, "Comments from the [respondent] panel this month reflect continued concern over a fragile global economy and soft orders across several manufacturing sectors." The sub-indices were mixed: The number of respondents reporting increased new orders was partially to completely offset by the combination of decreased import and export orders, and shrinking order backlogs. Although production expanded, growth in the employment index slowed.
 

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The service sector grew at a slower clip in October, reflected by a 0.9 percentage point drop (to 54.2 percent) in the non-manufacturing index (now known simply as the “NMI”). Comments by Anthony Nieves, chair of ISM’s Non-manufacturing Business Survey Committee, had much the same tenor as Holcomb’s. “The majority of the respondents' comments reflect a positive but guarded outlook on business conditions and the economy,” said Nieves. Not only did fewer respondents report growth in new orders, but order backlogs and import/export orders also contracted. The most encouraging aspects of the non-manufacturing report involved expanding employment and lessened input-price pressure.
 

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Wood Products reported contracting activity; new export orders contributed nearly all of the meager upbeat news for that industry. Paper Products’ expansion was limited to new orders, production and employment. Real Estate reported contraction in overall activity, thanks entirely to slower supplier deliveries. Construction, by contrast, expanded under the influence of employment, and new domestic and export orders. Ag & Forestry also exhibited growth in employment and new orders.

Prices increased for a variety of commodities, including corrugated products, linerboard, pallets, paper and caustic soda. Lumber was down in price. Some respondents reported gasoline and diesel as higher in price, and some as down in price. No relevant commodities were in short supply.


The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

October 2012 Employment Report

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According to the Bureau of Labor Statistics (BLS) non-farm payroll employment rose by 171,000 in October. Despite the jobs gain, the unemployment rate edged up to 7.9 percent because more people reentered the workforce. With the exception of Mining & Logging, all private supersectors reported some growth in October; government employment, on the other hand, contracted at the federal and state levels. The change in total non-farm payroll employment for August was revised from +142,000 to +192,000, and the change for September was revised from +114,000 to +148,000.
 

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The number of people not in the labor force fell by 369,000 (to 88.3 million) in October, retreating from August’s all-time high of 88.9 million. The ratio of employed persons to the entire population moved to 0.59, its highest value since August 2009.
 

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The civilian labor force participation rate (the share of the population 16 years and older working or seeking work) ticked up to 63.8 percent. At the same time, the annual percentage increase in average hourly earnings of production and non-supervisory employees dropped to 1.12 percent. With the price index for urban consumers rising at a 2.0 percent annual pace, that means wages are falling in real terms (i.e., wage increases are not keeping up with price inflation).
 

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Full-time employment added another 233,000 jobs to September’s increment of +838,000 jobs. Part-time employees fell, however, by 269,000 jobs.
 

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We like to cross-check the validity of data whenever alternative sources are available. The U.S. Treasury’s income and withholding tax data is one source we use to sanity test the BLS’s non-farm employment report. In principle, revenue from withholding taxes should rise when more people are working and fall when job losses occur. As the figure above shows, the revenue data are very “noisy;” even year-over-year percentage changes are quite volatile, thus we show a three-month moving average in the year-over-year line to better identify ongoing trends. The jump in October revenue appears to support the BLS’s claim of job growth; but we remain skeptical of both September’s original and revised estimates.
 

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Employment is converging with the previous peak at a slower pace than all prior recessions going back to 1973; circles in the chart above indicate when previous recoveries reached their corresponding pre-recessionary employment highs. The economy still has 4.27 million fewer jobs than at the January 2008 peak.
 

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The figure above presents a variety of forecasts related to when employment might return to the January 2008 peak (dashed line) or converge with the number of jobs that likely would exist had the recession not occurred (gray line). At October’s rate of job gains, it would take until November 2014 to retake January 2008’s employment level (i.e., without adjusting for population growth).


The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

October 2012 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil slipped lower in September, retreating by $5.15 (-5.4 percent) to $89.57 per barrel. That rise was concurrent with an up-swell of crude stocks, but occurred despite a slight weakening of the dollar and the lagged impacts of a jump in consumption of 625,000 barrels per day (BPD) -- to 19.2 million BPD -- during August.

The price spread between Brent crude (the predominant grade used in Europe) and WTI shrank in September (October Brent data was not yet available when this was written), to $18.14 per barrel. Brent and WTI prices had been essentially identical until the end of 2010.
 

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Data from the American Petroleum Institute (APA) indicates the August jump in consumption was more than reversed in September. API said that, for September, petroleum deliveries -- a key indicator of market demand -- fell to 18.2 million BPD, a 3.8 percent decline compared to last year and the second-lowest level for the month since 1996. "The September demand numbers indicate there's still substantial weakness in the economy," said API chief economist John Felmy. "While manufacturing and employment have improved some, we've yet to see strong momentum developing."

Although the oil futures price pattern suggests traders expect tight crude supplies through 3Q2013, it also appears the impact of that shortfall is waning. The decline in each contract’s price seems to support John Felmy’s contention about the weak economy.
 

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As part of a broader perspective of recent events, the world stopped getting warmer almost 16 years ago, according to new data released by the U.K.’s Met Office in mid-October. The figures, which have triggered debate among climate scientists, reveal that from the beginning of 1997 until August 2012, there was no discernible rise in aggregate global temperatures. Moreover, although Artic sea ice has been thinning during recent summers, Antarctic sea ice is arguably the thickest it has been in a decade. Hence, if the Met Office’s finding is indeed true, it is possible that the Arctic ice thinning trend may be reversed, and Antarctic ice could accumulate even more quickly.


The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

October 2012 Currency Exchange Rates

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The U.S. dollar gave a mixed monthly average performance in September against the three currencies we track: the greenback appreciated by 0.7 percent relative to Canada’s loonie and 1.0 percent against the yen, but depreciated 0.7 percent against the euro. On a trade-weighted index basis, the dollar weakened by 0.3 percent against a basket of 26 currencies.
 

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Canada: The loonie managed to stay stronger than parity with the greenback on a monthly average basis, thanks primarily to solid manufacturing growth. However, the currency weakened relative to September’s level under the triple influence of relatively low (1.2 percent) year-over-year inflation, Bank of Canada Governor Carney essentially eliminating the possibility of a rate hike in the near future, and the lagged effects of an August downturn in GDP growth -- the first monthly decline since February.

As for the Canadian forest products industry, more than 65 major capital and maintenance projects worth US$2.9 billion are ongoing across the country; individual projects range in value from $500,000 to $360 million. The solid wood sector has only 10 projects worth $140 million, while the remaining activity will take place at pulp and paper mill sites.

Europe: The euro inexplicably strengthened during October despite the pummeling it received from weakening fundamentals and Moody’s downgrading the debt of five Spanish regions. We suspect concerns over the U.S. fiscal cliff may have contributed to the euro’s appreciation.

Japan: As others have observed, the Japanese economy continues to be “a bug in search of a windshield,” but the country’s currency has remained surprisingly buoyant. Only time will tell whether we are witnessing just more white noise in the currency markets or the beginning of a trend, but the yen weakened in October under the combined weight of slumping exports, plans by the Bank of Japan to introduce yet another round of stimulus, and demographic trends that are eating away at the population’s traditionally high rate of saving.

China: Various data sources paint conflicting pictures of the Chinese economy. Although GDP growth was slower in 3Q than 2Q, official industrial production and retail sales numbers for September suggest the economy may be turning a corner. Electricity production tells a different tale, however; September’s output was down 11 percent from August (a four-month low) and up just 1.5 percent from a year earlier.

China and other countries are actively chipping away at the U.S. dollar’s reserve-currency status. Not only is China “no longer ‘hoovering’ up dollar reserves with its past abandon,” but more currencies have a higher degree of co-movement with the renminbi than with the greenback. We expect this trend to continue; while the dollar’s diminished influence will mean higher costs for goods imported into the United States, U.S. manufacturers will be more competitive in both domestic and global markets.


The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

September 2012 U.S. Construction

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Overall construction spending in the United States increased by 0.6 percent during September, to a seasonally adjusted and annualized rate (SAAR) of $851.6 billion. The gain in private residential spending more than offset the decline in the other categories.
 

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Total housing starts leapt by 15.0 percent in September, to 872,000 units (SAAR). Single-family starts increased to 603,000 units (+60,000 units or 11.0 percent) relative to August; at the same time, multi-family starts rose to 269,000 units (+54,000 units or 25.1 percent).
 

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New-home sales advanced by 5.7 percent, to 389,000 (SAAR). The median price of new homes sold fell by 3.2 percent, to $242,400. Because the change in single-unit starts (+60,000 units) exceeded that of sales (+21,000), the three-month average starts-to-sales ratio jumped to 1.55 in September.

Interestingly, the jump in sales was entirely a result of seasonal adjustments; on a not seasonally adjusted basis, sales during September were on par with August, and at their lowest level since February.
 

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Single-unit completions rose by 8.5 percent; the inventory of new single-family homes remained relatively stable at 145,000 units and 4.5 months.
 

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Existing home sales diverged with new home sales by retreating to 4.75 million units (-80,000 units or 1.7 percent, SAAR) in September. The share of total sales comprised of new homes rose to 7.6 percent, from 7.1 percent in August.
 

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The median price of previously owned homes sold in August edged up by $100 (less than 0.1 percent), to $188,700, causing housing affordability to move sideways.

Simultaneously, the not seasonally adjusted 10- and 20-city S&P/Case-Shiller home price indices showed average home prices increased by 0.9 percent for both the 10- and 20-City Composites in August versus July 2012. Nineteen of the 20 cities and both Composites posted positive monthly gains in August; Seattle was the only exception where prices declined 0.1 percent over the month.

“Home prices continued climbing across the country in August,” said David Blitzer, chair of the Index Committee at S&P Indices. “Nineteen of the 20 cities and both Composites showed monthly gains in August. Seventeen cities and both Composites posted positive annual returns in August 2012. In 18 cities and both Composites annual rates improved in August versus July. Dallas’ rate remained unchanged at +3.6 percent and Chicago worsened slightly from a -1.0 percent annual rate in July to a -1.6 percent annual rate in August.

“Phoenix continues to lead the home price recovery. It recorded its fourth consecutive month of double-digit positive annual returns with a +18.8 percent rate for August. Atlanta posted a -6.1 percent annual rate, however this is significantly better than the nine consecutive months of double-digit declines it posted from October 2011 through June 2012. Las Vegas’ annual rate finally moved to positive territory with a +0.9 percent annual rate of change in August 2012, its first since January 2007.

“The sustained good news in home prices over the past five months makes us optimistic for continued recovery in the housing market.

“News on home prices confirms other good news about housing. Single family housing starts are 43 percent ahead of last year’s pace, existing and new home sales are also up, the inventory of homes for sale continues to drop and consumer mortgage default rates are reaching new lows. Further consumer confidence continues to rise. Even as we end the seasonally strong home buying period, the statistics are positive. For the fifth time in a row, both Composites had monthly gains. Home prices in Seattle fell modestly in August, but other than that the 20 cities have also seen home prices generally improve since April.”
 

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Builders are gradually gaining more confidence in the residential market and hence applying for more permits. Total permits rose to 894,000 units (+90,000 units or 11.6 percent) in September; single family units increased to 545,000 units (+34,000 units or 6.7 percent) while multi-family units jumped to 349,000 units (+59,000 units or 20.3 percent).
 

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The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.