4Q2012 Gross Domestic Product: Second (Preliminary) 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, nearly 0.3 percentage point higher than the previous (advance) 4Q estimate and 3.0 percentage points lower than the current 3Q estimate. Personal consumption expenditures (PCE) and net exports (NetX) were positive, while government consumption expenditures (GCE) -- especially defense-related purchases, and private domestic investment (PDI) subtracted from 4Q growth, in that order.

Reactions to the report were mixed. “We still believe that the fourth-quarter GDP figures were a lot better than the headline stagnation suggests,” said Paul Ashworth, chief U.S. economist at Capital Economics. The firm had previously called the initial fourth-quarter report showing a decline “the best-looking contraction in U.S. GDP you’ll ever see.” Ashworth may have a point, because the BEA assumed annualized net aggregate inflation of 0.88 percent for this set of revisions. If the CPI-U had been used to convert the "nominal" GDP numbers into "real" numbers, the reported headline growth rate would have been 1.77 percent. Alternatively, if data for online prices from the Billion Prices Project had been used to deflate the BEA's nominal data, the growth rate would have been 1.02 percent annualized.

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The nod to Ashworth notwithstanding, Consumer Metrics Institute’s (CMI) observation that “neither this 0.14 percent positive growth rate nor the previously published -0.14 percent contraction rate show an economy that is statistically in anything other than a dead stall” fits better with our view. Moreover, CMI wrapped up its GDP report with the following prediction: “This data is still reporting 4Q-2012, a quarter that in retrospect may be viewed as the last gasp of the ‘Great Recovery’ -- before there were significant economic headwinds created by reductions in consumer take-home pay, rising gas prices, sequestered federal spending and accelerating contractions in global trade. If all other components of the economy stay the same, those factors alone could remove something like 3 percent from real-time economic "growth" by the end of the first quarter of 2013: the normalization of FICA deductions alone could reduce consumer spending enough to pull the headline number down by 1 percent, the $.50 per gallon increase in gas prices could similarly remove another 0.5 percent from the headline number, weakening exports could easily reduce the headline number by another 1 percent and the federal budget sequestrations -- if fully implemented and sustained -- should eventually pull (at maximum, despite doomsday rhetoric) an additional 0.5 percent from the headline number.”

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 Consumer and Producer Price Indices

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The seasonally adjusted Consumer Price Index (CPI) remained unchanged in January. Over the last 12 months, the all items index increased 1.6 percent before seasonal adjustment.

The index for all items less food and energy increased 0.3 percent in January. This increase offset another decline in the gasoline index and resulted in the seasonally adjusted all items index being unchanged, as it was last month. Increases in the indexes for shelter and apparel accounted for much of the increase in the index for all items less food and energy, with advances in the indexes for recreation, medical care, and airline fares also contributing.

The energy index fell 1.7 percent in January. Along with the gasoline index, the natural gas and fuel oil indexes also declined, while the electricity index increased. The index for food was unchanged in January after increasing in each of the previous ten months. The food at home index was unchanged with major grocery store food group indexes mixed.

The all items index increased 1.6 percent over the last 12 months; the 12-month change has been slowing since its recent peak of 2.2 percent in October. The index for all items less food and energy rose 1.9 percent over the last 12 months, the same figure as the last two months. The food index has risen 1.6 percent over the last 12 months while the energy index has declined 1.0 percent.

The seasonally adjusted Producer Price Index for finished goods (PPI) advanced 0.2 percent in January. Prices for finished goods declined 0.3 percent in December and 0.4 percent in November. At the earlier stages of processing, the index for intermediate goods was unchanged in January, and crude goods prices increased 0.8 percent. On an unadjusted basis, the finished goods index advanced 1.4 percent for the 12 months ended January 2013. 

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Prices received for intermediate goods is nearly unchanged relative to a year earlier (+0.4 percent); so, too, is the cost of wood fiber (+0.3 percent).Prices for softwood lumber, by contrast, are dramatically higher (+24.8 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 International Trade

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December exports of $186.4 billion and imports of $224.9 billion resulted in a goods and services deficit of $38.5 billion, down from $48.6 billion in November (revised). December exports were $3.9 billion more than November exports of $182.5 billion. December imports were $6.2 billion less than November imports of $231.1 billion. The deficit fell to its lowest level since January 2010 largely on exports of petroleum products and commercial jetliners.

Interestingly, China reported a December trade surplus with the United States of $18.7 billion at the same time the United States reported a Chinese trade deficit of $24.5 billion. This disparity has been an ongoing problem, and is of sufficient magnitude to influence U.S. GDP estimates.

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Exports of pulp, paper and paperboard advanced by 261,000 tons (10.4 percent). Imports, meanwhile, fell by 117,000 tons (14.3 percent). Exports were 46,000 tons (1.7 percent) higher than a year earlier while imports were down by 67,000 tons (8.8 percent). 

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U.S. pulp exports to China were nearly an order of magnitude larger than exports to the second-largest country in the list above (i.e., Mexico), and nearly on par year-to-date with 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 at nearly 90 percent, Canada absolutely dominates paper and paperboard imports into the United States.

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Softwood lumber exports rose by 12 MMBF (9.2 percent) in December while imports shed 83 MMBF (10.1 percent). Exports were 20 MMBF (15.8 percent) higher than year-earlier levels; imports were 58 MMBF (7.3 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 left the country through West Coast (especially Seattle, WA) customs districts during 2012. At the same time, however, Great Lakes customs districts (especially Duluth, MN) handled most of the softwood lumber imports coming into the United States. 

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Douglas-fir made up nearly one-quarter of all softwood lumber exports for all of 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 increased by 0.8 percent in November while prices fell by nearly 1.0 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 Industrial Production, Capacity Utilization and Capacity

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Industrial production edged down 0.1 percent in January after having risen 0.4 percent in December. In January, manufacturing output decreased 0.4 percent following upwardly revised gains of 1.1 percent in December and 1.7 percent in November. For 4Q2012 as a whole, manufacturing production is now estimated to have advanced 1.9 percent at an annual rate; previously, the increase was reported to have been 0.2 percent. In January, the output of utilities rose 3.5 percent, as demand for heating was boosted by temperatures that fell closer to their seasonal norms. At 98.6 percent of its 2007 average, total industrial production in January was 2.1 percent above its level of a year earlier.

Industrial production of Wood Products decreased by 1.3 percent, and Paper fell by 0.4 percent relative to December.

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The capacity utilization rate for total industry decreased in January to 79.1 percent, a rate 1.1 percentage points below its long-run (1972--2012) average. Capacity utilization fell by 1.1 percent for Wood Products while Paper decreased by comparatively modest 0.4 percent.

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Capacity at the all-industries and manufacturing levels moved higher (0.2 percent). By contrast, Wood Products dropped by 0.2 percent while Paper remained unchanged.

The outlook for U.S. manufacturing remains clouded. Some analysts believe the United States can “decouple from the rest of the globe and act as an island of economic prosperity.” However, wrote Lance Roberts, “with 40 percent of corporate profits tied to international exposure it is unlikely that the United States can remain decoupled from the rest of the global community for long.”

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.

February 2013 Macro Pulse -- Groundhog Day?

In the movie Groundhog Day, Phil Connors (Bill Murray) is a weatherman required to cover a story about Punxsutawney Phil (the weather forecasting “rat” in Connors’ parlance). This is his fourth year on the story, and he is quite vocal in his frustration. The movie takes a twist, however, when upon awakening during subsequent mornings Connors discovers it is Groundhog Day over and over again. At first he finds it entertaining but soon realizes he is doomed to spend the rest of eternity in the same place, seeing the same people do the same thing every day unless he changes his ways.

In many respects it seems to us the U.S. economy is experiencing its own version of Groundhog Day. For example....

Click here to read the entire February 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.

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

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Bureau of Economic Analysis (BEA) data showed that personal income increased $352.4 billion (2.6 percent) and disposable personal income (DPI) increased $331.3 billion (2.7 percent) in December. Personal consumption expenditures (PCE) increased $22.6 billion (0.2 percent). Real (inflation-adjusted) DPI increased 2.8 percent while real PCE increased 0.2 percent. 

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The BEA indicated that the jump in personal income during November and December “was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates. Personal income in December was also boosted by lump-sum social security benefit payments.” Excluding those special factors, DPI increased by a much more modest $44.1 billion (0.4 percent) in December following an increase of $66.5 billion (0.6 percent) in November.

In other words, as Zerohedge.com put it, “it was all a forward pull in comp in December to avoid the tax hikes from the January 1 Fiscal Cliff. Sure enough, of the $352 billion increase in personal income, some $268 billion, or 76% was due to Personal Dividend Income which exploded by some 34.3% to $1.05 trillion as companies ‘dividended’ income like crazy to avoid what they expected would be a huge increase in the dividend income tax.” 

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The Census Bureau reported that consumers increased retail spending by 0.5 percent (seasonally adjusted) during December as higher auto sales overcame the drag from gas stations. On an unadjusted basis, sales rose 12.7 percent between November and December, led by general merchandise stores. 

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Total consumer debt outstanding (CDO) rose by a seasonally adjusted $14.595 billion (6.3 percent annualized) in December. Revolving (mostly credit card) debt decreased by $3.6 billion (-5.1 percent annualized), while non-revolving debt (mainly student and auto loans) increased by a record $18.2 billion (11.4 percent annualized). Federal student loans comprised approximately half of December’s increase in non-revolving debt. 

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Total CDO jumped by $150.8 billion (5.7 percent) during 2012, of which $148.3 billion (98 percent) was comprised of non-revolving loans; federal student loans increased by $109.4 billion (nearly three-quarters of the total CDO increase).

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 ISM Reports

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Manufacturing expanded notably in January, with the Institute for Supply Management’s (ISM) PMI registering 53.1 percent, an increase of 2.9 percentage points from December's seasonally adjusted reading of 50.2 percent (50 percent is the breakpoint between contraction and expansion). “Manufacturing is starting out the year on a positive note,” observed Bradley Holcomb, chair of ISM’s Manufacturing Business Survey Committee, “with all five…component indexes -- new orders, production, employment, supplier deliveries and inventories -- registering above 50 percent in January.” Respondent quotes were less optimistic than might be expected from the PMI headline, however. For example, one Wood Products respondent said, "The general theme developing in our industry is that we can move suitable volumes. However, profit margin is elusive." 

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The service sector slipped slightly in January. The non-manufacturing index (now known simply as the “NMI”) registered 55.2 percent, 0.5 percentage point lower than December’s 55.7 percent. “Respondents' comments are mixed about the economy and business conditions,” said Anthony Nieves, chair of ISM’s Non-manufacturing Business Survey Committee; “however, the majority of respondents are optimistic about the overall direction.” Comments from a couple of relevant industries illustrate Nieves’ claim: "Business is good, but we find ourselves in a very competitive environment," said one Construction respondent. “No change in business levels since prior month,” wrote a Real Estate, Rental & Leasing respondent, “but optimism growing that commercial and industrial construction will experience growth in 2013.” 

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Wood Products reported slower activity, with a majority of respondents indicating fewer new or backlogged orders, higher input prices and lower production. Paper Products was unchanged overall. Real Estate expanded, but the contributing change was limited to larger order backlogs. Construction exhibited growth in new and export orders, and employment. Ag & Forestry mimicked Construction, but also reported new export orders.

Prices increased for a variety of commodities, including diesel and gasoline; pine, spruce and treated lumber; corrugated boxes/packaging; and caustic soda. Paper was the only relevant commodity 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 Manufacturers’ Shipments, Inventories and New Orders

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According to the U.S. Census Bureau, the value of manufactured-goods shipments increased $1.8 billion or 0.4 percent to $484.9 billion in December.

Shipments of durable goods increased $2.6 billion or 1.1 percent to $230.1 billion, led by primary metals. Nondurable goods shipments decreased $0.8 billion or 0.3 percent to $254.8 billion, led by beverage and tobacco products. Forest products shipments retreated by 0.1 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 3.9 percent decrease in not-seasonally adjusted rail shipments in December (relative to November), and a 4.2 percent drop from a year earlier; on a trend-line basis, total shipments were off 5.1 percent from a year earlier. Excluding coal carloads, year-over-year shipments were up 3.3 percent. Seasonal adjustments reversed the 3.9 percent November-to-December decrease, changing it to a 2.3 percent increase. Rail shipments of forest-related products were higher in December than a year earlier, thanks largely to a 16.3 percent jump in lumber and wood products shipments. The ATA’s advance index showed a 2.8 percent expansion in December. 

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Inventories increased $0.5 billion or 0.1 percent to $615.5 billion. The inventories-to-shipments ratio was 1.27, unchanged from November.

Inventories of durable goods decreased $0.1 billion to $374.5 billion, led by machinery. Nondurable goods inventories increased $0.6 billion or 0.2 percent to $241.0 billion, led by chemical products. Forest products inventories rose by 0.1 (Wood) and 0.4 (Paper) percent. 

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New orders for manufactured goods increased $8.6 billion or 1.8 percent to $484.8 billion. Excluding transportation, new orders increased 0.2 percent. New orders for durable goods increased $9.4 billion or 4.3 percent to $230.0 billion, led by transportation equipment, while nondurable goods orders decreased $0.8 billion or 0.3 percent to $254.8 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 appear to be “rolling over” and trending lower in real terms.

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 Employment Report

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According to the Bureau of Labor Statistics (BLS), non-farm payroll employment rose by a modest 157,000 in January. The unemployment rate was 7.9 percent, unchanged from the upwardly revised December estimate. All private supersectors reported some growth in January; government employment, by contrast, contracted at the federal and local levels. As part of the BLS’s annual benchmarking process, which showed 335,000 more jobs than initially estimated for all 2012, the change in total non-farm payroll employment for November was revised from +161,000 to +247,000, and the change for December was revised from +155,000 to +196,000. 

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Despite the upbeat revelation that more people were employed during 2012, other aspects of the employment report were still dismal. For example, the ratio of employed persons to the entire population remained mired in the range seen since late 2009, which means employment gains have barely kept pace with population growth. Also, the number of people not in the labor force jumped by 169,000 (to a new all-time high of 89.0 million) in January. 

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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 extended recent gains when rising to 1.8 percent. Even so, with the price index for urban consumers rising at a 1.7 percent annual pace, wages are barely holding steady in real terms (i.e., wage increases just keeping up with price inflation). 

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Another 50,000 people found full-time jobs, but part-time employment reversed course and increased by a nearly identical 55,000. We suspect this reversal may be related to the ObamaCare requirement that firms with 50 or more employees provide health care benefits to everyone working 30 or more hours per week. 

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We use the U.S. Treasury’s income and withholding tax data 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. December’s outsized spike in taxes withheld was likely a result of year-end bonuses and moving payments forward in time to avoid the higher taxes that “kicked in” with the new year. Although taxes withheld in January declined relative to December, the data do not necessarily invalidate 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 3.2 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 January’s rate of job gains, it will take until October 2014 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.

January 2013 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil rose faster in January, advancing by $6.44 (+7.3 percent) to $94.69 per barrel. That rise was concurrent with a slight weakening of the dollar, but occurred despite the lagged impacts of a drop in consumption of 118,000 barrels per day (BPD) -- to 18.6 million BPD -- during November, and a uptick in already-plentiful crude stocks.

The price spread between Brent crude (the predominant grade used in Europe) and WTI shrank in December (January Brent data was not yet available when this was written), to $21.24 per barrel. Brent and WTI prices had been essentially identical until the end of 2010. 

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Many analysts expected the above-normal crude stocks to drive near-term prices (including those of gasoline and diesel) lower, but that has not happened. Geopolitical tensions (e.g., the takeover of and hostage-taking at an Algerian natural gas plant by Islamist militants, and Israeli air strikes of military targets in Syria) have kept oil prices elevated; consumer confidence has suffered as a result.

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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 lower 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.