4Q2012 Gross Domestic Product: First (Advance) Estimate

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The Bureau of Economic Analysis (BEA) estimated 4Q2012 growth in real U.S. gross domestic product (GDP) at a seasonally adjusted and annualized rate of -0.1 percent, 3.2 percentage points lower than the current 3Q estimate. Only personal consumption expenditures (PCE) were net positive; government consumption expenditures (GCE) -- especially defense-related purchases, net exports (NetX) and private domestic investment (PDI) subtracted from 4Q growth, in that order.  

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Consumer Metrics Institute (CMI) listed several “take-aways” from the report:

-- As detailed [in the rest of CMI’s report], the contraction was driven primarily by dramatic (but not unexpected) reversals to the one-quarter spikes in government spending and inventory growth, which sharply (and conveniently) improved the headline number just prior to the November election. At best both of those one-quarter binges simply brought zero-sum economic activity forward by a quarter, and at worse we will see both of these surges later treated as data anomalies that disappear in future revisions.

-- For those of us who follow these numbers closely (and perhaps foolishly try to make some longer-term sense of them), the inexplicable economic surge reported for the third quarter has now at least reversed, and the general weakening pattern previously recorded for 2012 seems to have been confirmed.

-- The consumer data was actually a modest bright spot. Per-capita disposable income increased substantially, as did personal consumption expenditures for both goods and services. Similarly commercial fixed investment expenditures improved.

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 International Trade

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Total November exports of $182.6 billion and imports of $231.3 billion resulted in a goods and services deficit of $48.7 billion, up from $42.1 billion in October (revised). November exports were $1.7 billion more than October exports of $180.8 billion.  November imports were $8.4 billion more than October imports of $222.9 billion.

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Paper exports retreated, falling by 103,000 tons (4.0 percent). Imports rose modestly, by 58,000 tons (7.7 percent). Exports were 75,000 tons (3.1 percent) higher than a year earlier while imports were up by 42,000 tons (5.5 percent).

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U.S. pulp exports to China are nearly an order of magnitude larger than exports to the second-largest country in the list above (i.e., Mexico), and have been relatively stable year-to-date compared to 2011. Asia is the destination for over three-fourths of U.S. pulp exports, with the rest of North America running a distant second.

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Paper and paperboard exports are somewhat more evenly split; the combination of Mexico and Canada receive a little more than one-third of U.S. exports, while Asia (especially India and Japan) is the destination for just under a third.

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Canada supplies over two-thirds of pulp imports into the United States, followed distantly by Brazil.

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Pegging nearly 90 percent, Canada absolutely dominates paper and paperboard imports into the United States.

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Softwood lumber exports fell by 6 MMBF (4.0 percent) in November while imports plummeted by 110 MMBF (11.8 percent). Exports were 1 MMBF (1.1 percent) lower than year-earlier levels; imports were 57 MMBF (7.5 percent) lower.

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North America (Canada and Mexico), followed by Asia (especially China and Japan), continue to be the primary destinations for U.S. softwood lumber exports. Meanwhile, Canada is far-and-away the largest source of softwood lumber imports into the United States.

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Just over half of U.S. softwood lumber exports have left the country through West Coast (especially Seattle, WA) customs districts. At the same time, however, Great Lakes customs districts (especially Duluth, MN) have handled most of the softwood lumber imports coming into the United States.

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Douglas-fir has made up nearly one-quarter of all softwood lumber exports so far in 2012, followed by southern yellow pine.

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On a global scale, data compiled by the Netherlands Bureau for Economic Policy Analysis showed that world trade volume edged up by 0.4 percent in October while prices fell by 0.4 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.

December 2012 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 1.7 percent before seasonal adjustment.

The gasoline index declined again in December, but other indexes, notably food and shelter, increased, resulting in the seasonally adjusted all items index being unchanged. Gasoline was the only major energy index to decline; the indexes for natural gas and electricity both increased.  Within the food category, five of the six major grocery store food groups increased as the food at home index rose for the third consecutive month.

The index for all items less food and energy increased 0.1 percent in December, the same increase as in November. Besides shelter, the indexes for airline fares, tobacco, and medical care also increased. The indexes for recreation, household furnishings and operations, and used cars and trucks all declined in December.

The all items index increased 1.7 percent over the last 12 months, compared to a 1.8 percent figure in November. The index for all items less food and energy rose 1.9 percent over the last 12 months, the same figure as last month. The food index has risen 1.8 percent over the last 12 months, and the energy index has risen 0.5 percent.

The seasonally adjusted Producer Price Index for finished goods (PPI) declined 0.2 percent in December. Prices for finished goods fell 0.8 percent in November and 0.2 percent in October. At the earlier stages of processing, prices received by manufacturers of intermediate goods moved up 0.3 percent, and the crude goods index increased 2.5 percent. On an unadjusted basis, the finished goods index rose 1.3 percent in 2012, compared with a 4.7-percent advance in 2011.

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Prices received for intermediate goods rose relative to a year earlier (0.3 percent); the cost of wood fiber declined (-1.3 percent), whereas the other categories rose on a year-over-year basis -- especially prices for softwood lumber (+17.3 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.

December 2012 Industrial Production, Capacity Utilization and Capacity

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Industrial production increased 0.3 percent in December after having risen 1.0 percent in November when production rebounded in the industries that had been negatively affected by Hurricane Sandy in late October. For the fourth quarter as a whole, total industrial production moved up at an annual rate of 1.0 percent. Manufacturing output advanced 0.8 percent in December following a gain of 1.3 percent in November; production edged up at an annual rate of 0.2 percent in the fourth quarter. Manufacturing’s gains during November and December were the result of the Fed’s seasonal adjustments; output declined during both months on an unadjusted basis.

At 98.1 percent of its 2007 average, total industrial production in December was 2.2 percent above its year-earlier level. Industrial production of Wood Products decreased by 1.2 percent and Paper fell by 0.4 percent relative to November.

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Capacity utilization for total industry moved up 0.1 percentage point to 78.8 percent, a rate 1.5 percentage points below its long-run (1972--2011) average. Capacity utilization fell by 1.0 percent for Wood Products, but Paper decreased by only 0.2 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 0.2 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.

January 2013 Macro Pulse -- A Not-so-unexpected Journey

In J.R.R. Tolkien’s classic The Hobbit, protagonist Bilbo and his companions are captured by trolls who intend to eat them. The hapless band is spared such a gruesome fate, however, when the trolls -- whose incessant, violent arguing makes them oblivious to the coming dawn -- are turned to stone by a sunbeam. We see parallels between that fragment of Tolkien’s tale and events unfolding in our own, somewhat less fantastic world. For example, our national political leaders are arguing over how to “eat” the productive members of the U.S. economy through higher taxes, all the while seemingly in denial about the fiscal “sunbeam” about to break above the horizon. As long-term readers of this column are only too well aware, we do not anticipate as happy an outcome for our country.

Click here to read the entire January 2013 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.

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

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Bureau of Economic Analysis data showed that personal income increased $85.8 billion (0.6 percent) and disposable personal income (DPI) rose $74.7 billion (0.6 percent) in November. Personal consumption expenditures (PCE) advanced $41.3 billion (0.4 percent). Real (inflation-adjusted) DPI increased 0.8 percent while real PCE increased 0.6 percent.

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Although aggregate personal income continues to set new highs on a nominal basis, in inflation-adjusted terms it only finally exceeded the previous peak in November. Taking population growth into account makes the picture even gloomier; per-capita real personal income has recouped less than two-thirds of the prior peak-to-trough loss. It remains to be seen whether November’s jump upward can be sustained or trends lower in the fashion of 2011.

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The Census Bureau reported that consumers increased retail spending during November by 0.3 percent (seasonally adjusted); greater auto sales and online purchases overcame the drag from gas stations. On an unadjusted basis, sales rose 2.5 percent between October and November, led by general merchandise stores.

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Total consumer debt outstanding rose by a seasonally adjusted $16.045 billion (7.0 percent annualized) in November. Revolving (mostly credit card) debt increased by $0.8 billion (1.1 percent annualized), while non-revolving debt (mainly student and auto loans) increased by $15.2 billion (9.6 percent annualized). Federal student loans comprised nearly two-thirds of the increase in non-revolving debt, and over one-quarter of the increase in total debt outstanding.

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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.

November 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 $2.0 billion or 0.4 percent to $483.7 billion. The unfilled orders-to-shipments ratio was 6.14, up from 6.23 in October.

Shipments of durable goods increased $3.5 billion or 1.6 percent to $227.0 billion, led by transportation equipment. Nondurable goods shipments decreased $1.5 billion or 0.6 percent to $256.7 billion, led by petroleum and coal products. Forest products shipments retreated by 1.9 percent (Wood) and 0.3 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 20.5 percent decrease in not-seasonally adjusted rail shipments in November (relative to October), and a 4.0 percent drop from a year earlier; on a trend-line from a year earlier, total shipments were off 5.0 percent. Excluding coal carloads, year-over-year shipments were up 3.3 percent. Seasonal adjustments reversed the 20.5 percent October-to-November decrease, changing it to a 3.3 percent increase. Rail shipments of forest-related products were higher in November than a year earlier, thanks largely to a 10.0 percent jump in lumber and wood products shipments. The ATA’s advance index showed a 3.7 percent expansion in November.

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Inventories decreased slightly to $615.2 billion. The inventories-to-shipments ratio was 1.27, down from 1.28 in October.

Inventories of durable goods increased $0.8 billion or 0.2 percent to $374.8 billion -- the highest level since the series was first published on a NAICS basis -- led by transportation equipment. Nondurable goods inventories decreased $0.8 billion or 0.3 percent to $240.4 billion, led by petroleum and coal products. Wood and Paper inventories were split: Wood rose by 0.4 while Paper fell by 0.3 percent.

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New orders for manufactured goods in November increased $0.2 billion to $477.6 billion. Excluding transportation, new orders increased 0.2 percent. New orders for durable goods increased $1.7 billion or 0.8 percent to $220.9 billion, led by machinery, while nondurable goods orders decreased $1.5 billion or 0.6 percent to $256.7 billion.

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 either flat (nominal) or trending lower (real).

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.

December 2012 ISM Reports

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Manufacturing expanded slightly in December, with the Institute for Supply Management’s (ISM) PMI registering 50.7 percent -- from 49.5 percent in November (50 percent is the breakpoint between contraction and expansion). “Comments from the [respondent] panel this month are mixed, with some indicating a strengthening of demand and others indicating a continuing softness in demand,” observed Bradley Holcomb, chair of ISM’s Manufacturing Business Survey Committee. “Additionally, many respondents express uncertainty about government regulations, taxes and global economics in general as we approach 2013.”

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The service sector report was even more upbeat. The non-manufacturing index (now known simply as the “NMI”) registered 56.1 percent in December, 1.4 percentage point higher than November’s 54.7 percent -- indicating faster growth. “Respondents' comments remain mixed,” said Anthony Nieves, chair of ISM’s Non-manufacturing Business Survey Committee, “and are mostly positive about business conditions and the economy.”

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Wood Products reported expanded activity, although higher employment and backlogged orders were the only contributing categories. Paper Products’ expansion, on the other hand, was supported from a majority of sub-indices. Overall activity expanded in Real Estate, but the change was limited to inventories. Construction exhibited growth in new, backlogged and export orders; and employment and inventories. Ag & Forestry also grew, but only in new import and export orders.

Prices increased for a variety of commodities, including pine, spruce and treated lumber; corrugated boxes/packaging; and caustic soda. Gasoline, diesel fuel and natural gas were 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.

December 2012 Employment Report

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According to the Bureau of Labor Statistics (BLS) non-farm payroll employment rose by a modest 155,000 in December. The unemployment rate was 7.8 percent, unchanged from the upwardly revised November estimate. With the exception of Information, and Trade, Transportation & Utilities, all private supersectors reported some growth in December; government employment, on the other hand, contracted at the federal and local levels. The change in total non-farm payroll employment for October was revised from +138,000 to +137,000, and the change for November was revised from +146,000 to +161,000.

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The number of people not in the labor force edged lower (by 16,000 to 88.8 million) in December, still just 80,000 short of August’s all-time high. The ratio of employed persons to the entire population also ticked lower, but remained near 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) held steady at 63.6 percent. At the same time, the annual percentage increase in average hourly earnings of production and non-supervisory employees jumped to 1.68 percent. Even so, with the price index for urban consumers rising at a 1.8 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 added another 203,000 jobs while part-time employees fell by a nearly identical 220,000.

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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. While December’s outsized spike in taxes withheld is likely at least partially a result of year-end bonuses, the data appear to substantiate the BLS’s claim of job growth.

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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 4.0 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 November’s rate of job gains, it would take until March 2015 to recapture 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.

December 2012 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil turned higher in December, advancing by $1.59 (+1.8 percent) to $88.25 per barrel. That drop was concurrent with a slight weakening of the dollar, a modest drop-off in crude stocks, and the lagged impacts of a jump in consumption of 549,000 barrels per day (BPD) -- to 18.7 million BPD -- during October.

The price spread between Brent crude (the predominant grade used in Europe) and WTI shrank in November (December Brent data was not yet available when this was written), to $22.40 per barrel; that differential was the widest in over a year. Brent and WTI prices had been essentially identical until the end of 2010.

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While traders pushed futures prices modestly higher, it is apparent they think the crude oil market is going through another transition. As a result, near-term contracts are in “contango” (each subsequent contract is priced higher than its predecessor) while latter contracts are in “backwardation” (each subsequent contract is priced higher than its predecessor). Our interpretation of this pattern is that traders anticipate tight oil markets through mid-year 2013, but loosening supplies thereafter.

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.