2Q2013 Gross Domestic Product: Second (Preliminary) Estimate

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The Bureau of Economic Analysis (BEA) estimated 2Q2013 growth in real U.S. gross domestic product (GDP) at a seasonally adjusted and annualized rate of +2.5 percent. That rate was a whopping 1½ times higher than the 1.7 percent reported less than a month ago, and beat expectations of 2.2 percent. Private domestic investment (PDI) and personal consumption expenditures (PCE) added to 2Q growth, in that order; government consumption expenditures (GCE) dragged on growth, while net exports (NetX) was a “wash.”

The most material change in this report was the improvement in NetX. Exports contributed 1.11 percent to the overall growth rate, up sharply from the 0.71 percent previously reported (and up even more remarkably from the -0.18 percent contraction recorded in 1Q2013). Imports subtracted 1.11 percent from the headline number -- exactly offsetting the growth provided by exports.

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For this revision, Consumer Metrics Institute (CMI) pointed out “the BEA assumed annualized net aggregate inflation of 0.71 percent. In contrast, during 1Q the seasonally adjusted CPI-U index published by the Bureau of Labor Statistics (BLS) rose by 1.04 percent (annualized), and the price index published by the Billion Prices Project (BPP) rose at an annualized rate of 1.76 percent. As a reminder: an understatement of assumed inflation increases the reported headline number -- and in this case the BEA's relatively low deflator boosted the published headline rate. If the CPI-U had been used to convert the ‘nominal’ GDP numbers into ‘real’ numbers, the reported headline growth rate would have been a somewhat lower +2.20 percent. And if the BPP index (which arguably best reflects the experiences of the American consumer) had be used as the deflator, the economy would have been a more modest +1.48 percent annualized rate.”

ZeroHedge highlighted a disturbing trend in a critical part of the report: Real Final Sales growth is “collapsing.” In fact, as ZH showed, the current slow level of growth in real final sales has never occurred outside of a recession. Nonetheless, this report will almost certainly provide support for the Federal Reserve to “taper” its purchases of Treasury bonds and mortgage-backed securities, should it choose to do so.

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.

August 2013 Macro Pulse -- Hall of Mirrors

Across the country, state and county fairs are popular attractions at this time of year. A fair worthy of the name will usually include a fun house, complete with a hall of mirrors, among the carny barkers and stands hawking deep-fried candy bars. These mirrors are all distorted in some way, able to morph even the comeliest fairgoer into a misshapen caricature. In some respects, it seems many recent data reports were released through a hall of mirrors – and the data did not look that great to begin with. For example:

Click here to read the entire July 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.

July 2013 Consumer and Producer Price Indices (incl. Forest Products)

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The seasonally adjusted Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2 percent in July. Over the last 12 months, the all items index increased 2.0 percent before seasonal adjustment. The rise in the seasonally adjusted all items index was the result of increases in a broad array of indexes including shelter, gasoline, apparel, and food. Despite the gasoline increase, the energy index rose only 0.2 percent as the natural gas and electricity indexes declined. The increase in the food index was caused by a sharp rise in the fruits and vegetables index; other food indexes were mixed.

The seasonally adjusted Producer Price Index for finished goods (PPI) was unchanged in July after an 0.8 percent increase in June. At the earlier stages of processing, prices received by manufacturers of intermediate goods also were unchanged in July, and the crude goods index rose 1.2 percent. On an unadjusted basis, prices for finished goods advanced 2.1 percent for the 12 months ended July 2013. 

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Lumber prices declined in July, whereas the Wood Fiber and Pulp, Paper & Allied Products indices achieved new highs. All of the indices are higher than year-earlier levels, however. 

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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.

July 2013 Industrial Production, Capacity Utilization and Capacity

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Industrial production (IP) was unchanged in July after having gained 0.2 percent in June. In July, manufacturing production declined 0.1 percent; this contradicted data from the Institute for Supply Management showing a substantial jump in manufacturing activity. At 98.9 percent of its 2007 average, total industrial production in July was 1.4 percent above its year-earlier level. Activity in the Wood Products industry shrank by 0.6 percent while Paper dropped by 0.2 percent. 

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Capacity utilization for total industry edged down 0.1 percentage point to 77.6 percent in July, a rate 0.3 percentage point below its level of a year earlier and 2.6 percentage points below its long-run (1972--2012) average. Wood Products capacity utilization fell by 0.7 percent while Paper nudged 0.1 percent lower. 

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Capacity at the all-industries and manufacturing levels moved higher (both 0.1 percent). By contrast, Wood Products remained unchanged while Paper contracted by 0.1 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.

June 2013 International Trade (Pulp, Paper & Paperboard)

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Exports of pulp, paper and paperboard decreased by 142,000 metric tons (5.9 percent) in June. Imports also fell, but by a more modest 66,000 tons (8.2 percent). Exports were 115,000 tons (4.8 percent) below year-earlier levels while imports were just 7,000 tons (less than 0.1 percent) lower. Net exports fell 4.8 percent relative to May, and by 6.6 percent from June 2012. On a year-to-date basis net exports were nearly 6 percent lower than the same six month period during 2012. 

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Year-to-date pulp exports are nearly 4 percent off the prior year’s pace. Year-to-date pulp exports to China represent nearly 60 percent of total U.S. pulp exports. The top ten destinations account for 87 percent of all pulp exports. Among the top 10 year-to-date pulp exports, Canada registered the largest year-over-year percentage loss in pulp exports and Taiwan registered the largest year-over-year percentage increase in pulp exports. 

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Year-to-date paper and paper board exports are up nearly 8 percent. Mexico still is the chief destination of U.S. paper and paperboard exports in 2013 but Canada is rapidly narrowing the gap. Other significant changes relative to 2012 year-to-date levels are in increase of 55 percent to the Dominican Republic, +26 percent to China, and +19 percent to Taiwan. Pakistan’s 2013 receipt of paper and paperboard from the United States is more than 10 times greater than the comparable period in 2012; June was no exception, with exports nearly 12 times June 2012’s level. 

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Year-to-date pulp imports are nearly 6 percent higher than the prior year’s level. Canada and Brazil account for 96 percent of total pulp imports in 2013. Brazil’s 2013 imports are 26.1 percent higher than 2012; Chile’s are a whopping 174.4 percent higher than in 2012, while Mexico’s are up 53.3 percent. Imports from Russia, which in June 2012 ranked as the 9^th highest pulp importer, have nearly disappeared in 2013, falling over 90 percent from 2012’s level. On the other hand, Indonesia had no pulp imports in 2012 but has vaulted into the 10^th ranked pulp importer year-to-date in 2013. 

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Year-to-date paper and paperboard imports are essentially flat compared to prior year levels. Canada is far and away the larger source of imported paper and paperboard, representing 90 percent of total imports. Among the top 10, Sweden, South Korea, and Brazil have all posted drops of over 20 percent. France and India, who have swapped positions 10 and 11 between 2012 and 2013, have both posted gains of at least 40 percent year-to-date.

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.

June 2013 International Trade (Softwood Lumber)

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Softwood lumber exports fell by 13 MMBF (8.2 percent) in June while imports decreased by 82 MMBF (also 8.2 percent). Exports were 15 MMBF (11.8 percent) above year-earlier levels; imports were 124 MMBF (15.5 percent) higher. 

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North America (i.e., Canada and Mexico) reclaimed the “top spot” for U.S. softwood lumber exports in June, although Asia (especially China and Japan) ran a close second; as usual, Canada was the largest single-country destination. Meanwhile, Canada was far-and-away the largest source of softwood lumber imports into the United States. Imports from Romania, Austria, Estonia, Lithuania, Sweden and Malaysia have increased markedly on both year-over-year and year-to-date change bases. Interestingly, however, imports are on the decline from an expanding number of countries. 

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Just under half of U.S. softwood lumber exports left the country through West Coast (primarily Seattle, WA) customs districts in June. Volume appears to have fallen off in the Columbia-Snake district, as its ranking has fallen from 3^rd to 8^th on a YTD basis. At the same time, Great Lakes customs districts (especially Duluth, MN) handled most of the softwood lumber imports coming into the United States. The Charlotte district has seen traffic pick up this year; its ranking has improved from 26^th to 11^th. 

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Douglas-fir made up just under one-quarter of all softwood lumber exports in June, followed by southern yellow pine. Hemlock exports have fallen off on a YTD basis, dropping that species’ ranking from 3^rd to 7^th.

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.

June 2013 International Trade (General)

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Total June exports of $191.2 billion (an all-time high in nominal-dollar terms) and imports of $225.4 billion resulted in a goods and services deficit of $34.2 billion. June’s deficit was down 22.5 percent from May’s $44.1 billion and the lowest since October 2009. June exports were $4.1 billion more than May exports of $187.1 billion. June imports were $5.8 billion less than May imports of $231.2 billion. 

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On a global scale, data compiled by the Netherlands Bureau for Economic Policy Analysis showed that world trade volume decreased by 0.3 percent in May while prices fell by 1.3 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.

July 2013 ISM Reports

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The most-closely followed nationwide manufacturing diffusion index jumped in July. The Institute for Supply Management’s (ISM) PMI 55.4 percent, an increase of 4.5 percentage points from June's reading of 50.9 percent (50 percent is the breakpoint between contraction and expansion). “Comments from the [respondent] panel generally indicate stable demand and slowly improving business conditions,” said Bradley Holcomb, chair ISM’s Manufacturing Business Survey Committee. 

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The magnitude of the PMI’s advance was somewhat unexpected, as the Chicago Business Barometer --usually a fairly reliable indicator of how the PMI will behave -- printed well below expectations. In any event, one Paper Products respondent opined that "overall conditions remain steady and slightly above prior year."

The pace of growth in the service sector exploded higher as well in July. The non-manufacturing index (now known simply as the “NMI”) registered 56 percent, 3.8 percentage points higher than the 52.2 percent registered in June. That move was the largest monthly increase since April 2009 and handily beat expectations of 53.1 percent. The non-manufacturing report contained no comments from industries we track. 

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Relevant commodities up in price included caustic soda, corrugated boxes and packaging, oil, diesel and gasoline, and paper products. Natural gas 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.

June 2013 Manufacturers’ Shipments, Inventories and New & Unfilled Orders

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According to the U.S. Census Bureau, the value of manufactured-goods shipments decreased $2.0 billion or 0.4 percent to $481.8 billion in June. Durable goods shipments decreased $0.5 billion or 0.2 percent to $229.4 billion, led by transportation equipment.

Shipments of nondurable goods decreased $1.5 billion or 0.6 percent to $252.4 billion, led by beverage and tobacco products. Wood shipments retreated by 1.5 percent, but Paper advanced by 0.3 percent. 

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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 an 18.9 percent decrease in not-seasonally adjusted rail shipments in June (relative to May), and a 0.3 percent drop from a year earlier; on a trend-line basis, total shipments were off 1.2 percent from a year earlier. Excluding coal carloads, year-over-year shipments were up 1.3 percent. Seasonal adjustments reversed the 18.9 percent May-to-June decrease, turning it into a 1.2 percent increase. Rail shipments of forest-related products were higher in June than a year earlier, thanks largely to a 3.3 percent rise in pulp and paper products shipments. The ATA’s advance index showed a 0.1 percent rise in June. 

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Inventories increased $0.7 billion or 0.1 percent to $627.7 billion, the highest level since the series was first published on a NAICS basis in 1992. The inventories-to-shipments ratio was 1.30.

Durable goods inventories increased $0.3 billion or 0.1 percent to $377.4 billion (also the highest level since the series was first published on a NAICS basis), led by transportation equipment. Inventories of nondurable goods increased $0.4 billion or 0.2 percent to $250.2 billion, led by petroleum and coal products.

Wood and Paper inventories both declined by 0.1 percent. 

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New orders increased $7.6 billion or 1.5 percent to $496.7 billion; excluding transportation, new orders decreased 0.4 percent. Durable goods orders increased $9.1 billion or 3.9 percent to $244.2 billion, led by transportation equipment. New orders for nondurable goods decreased $1.5 billion or 0.6 percent to $252.4 billion. 

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Unfilled orders increased $21.5 billion or 2.1 percent to $1,029.9 billion; the unfilled orders-to-shipments ratio 6.38, up from 6.23 in May. Durable goods increased $21.5 billion or 2.1 percent to $1,029.9 billion, led by transportation equipment. Real (i.e., inflation adjusted) unfilled orders, a good litmus test for sector growth, have regained roughly half the ground given up during the Great Recession.

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.

July 2013 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil shot higher in July, rising by $10.81 (11.5 percent) to $104.61 per barrel. That price increase coincided with a falloff in crude stocks, but occurred despite a modest strengthening of the dollar and the lagged impacts of still-tepid consumption levels -- including a drop of 2,000 barrels per day (BPD) to 18.6 million BPD in May. The Federal Reserve Open Market Committee’s failure to provide a timetable for scaling back its quantitative easing policy likely also contributed to the price rise.

The monthly average price spread between Brent crude (the predominant grade used in Europe) and WTI expanded in June by over 17 percent, to $9.12 per barrel; Brent and WTI prices were essentially identical until the end of 2010. 

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We believe that a combination of geopolitical tensions and the effects of monetary policies being implemented by central bank (resulting in what Charles Hugh Smith terms “the financialization of commodities”) pushed futures prices higher during the past month. 

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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.

July 2013 Currency Exchange Rates

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In July the monthly average value of the U.S. dollar appreciated against all three of the major currencies we track: by 2.8 percent relative to the yen, 1.1 percent against the euro, and 1.0 percent against Canada’s loonie. On a trade-weighted index basis, the dollar strengthened by 0.7 percent against a basket of 26 currencies. 

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The greenback’s strength is adversely affecting U.S. exports, particularly of pulp, paper and paperboard.

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.

June 2013 U.S. Construction

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Overall construction spending in the United States decreased by 0.6 percent during June, to a seasonally adjusted and annualized rate (SAAR) of $883.9 billion, thanks to, respectively, 0.9 and 1.1 percent declines in private residential and public construction spending.

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Total housing starts retreated by 9.9 percent in June (-16.8 percent from March’s breach of the one million unit mark), to 836,000 units (SAAR), mainly on weakness in the multi-family component. Single-family starts dropped by a modest 5,000 units (0.8 percent) to 591,000 units, whereas the fallback in multi-family starts was much more dramatic: -87,000 units, or 26.2 percent, to 245,000 units. 

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June’s drop in starts wasn’t the fault of questionable seasonal adjustments, as not-seasonally adjusted estimates also declined (especially multi-family starts, at -30.0 percent). Total starts were just 7.6 percent higher than year-earlier levels. 

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Sales of new single-family homes advanced by 38,000 units (8.3 percent) to 497,000 (SAAR) -- the highest rate since May 2008. Meanwhile, the median price of new homes sold fell by $13,100 (5.0 percent), to $249,700. With sales advancing in the face of retreating starts, the three-month average starts-to-sales ratio dropped to 1.27 in June. 

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Single-unit completions followed starts lower (by -6,000 units or 1.1 percent), while the inventory of new single-family homes ticked higher in absolute terms (+2,000 units) but months-of-sales slid to 3.9 months. 

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Existing home sales retreated (-60,000 units or 1.2 percent) to 4.97 million units (SAAR) in June; as a result, the share of total sales comprised of new homes ticked up to 8.9 percent. The median price of previously owned homes sold in June pushed upward (by $11,100 or 5.5 percent), to $214,200  the highest price since June 2008. 

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The continued rise in the median price of existing homes for sale ($16,600 or 8.6 percent in May) is adversely impacting housing affordability. Concurrently, Standard & Poor’s reported that the 10- and 20-City Composites in the S&P/Case-Shiller Home Price indices posted respective monthly gains of 2.5 and 2.4 percent in May (11.8 and 12.2 percent, respectively, relative to a year earlier). 

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Despite builders’ rising confidence in the residential market, the number of permits applied for settled lower in June. Total permits fell to 911,000 units (-74,000 units or 7.5 percent). The drop resulted primarily because of weakness in the multi-family component (-78,000 units or 21.4 percent, to 287,000 units); by contrast, single-family units rose by a modest 4,000 units (0.6 percent), to 624,000 units. Total permits were 9.7 percent higher in June than a year earlier.

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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.