1Q2014 Gross Domestic Product: Second (Preliminary) Estimate

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According to the Bureau of Economic Analysis (BEA), the “preliminary” estimate of 1Q2014 growth in real U.S. gross domestic product (GDP) contracted for the first time since 1Q2011 -- at a seasonally adjusted and annualized rate of -1.0 percent. That pace of growth was down by 3.6 percentage points relative to 4Q2013 and 5.1 percentage points lower than 3Q2013. Only one of the four categories -- personal consumption expenditures (PCE) contributed to 4Q growth; the other categories -- private domestic investment (PDI), net exports (NetX), and government consumption expenditures (GCE) -- subtracted from growth.

The largest revisions to the headline number (April's "advance" estimate had been +0.1 percent) came from inventories (lowered by 1.05 percentage points) and imports (down 0.36 percent). Although exports improved somewhat from the report released at the end of April, they still subtracted 0.83 percent from the headline. Fixed investment in both equipment and construction shrank further. Government spending also contracted more quickly, with the downward revisions mainly concentrated in state and local governmental infrastructure investment. Consumer spending received a marginal upward revision. 

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For this report the BEA assumed annualized net aggregate inflation of 1.28 percent. By way of comparison, the growth rate of the Bureau of Labor Statistics’ seasonally adjusted CPI-U index was higher (1.8 percent annualized rate); meanwhile, the price index reported by the Billion Prices Project (BPP) was substantially higher at 3.91 percent. Were the BEA’s nominal estimates corrected for inflation using the BPP inflation rate, 1Q real GDP would have contracted by 3.64 percent.

Interestingly, if one excludes the stimulus to the U.S. economy generated by spending for mandatory Affordable Care Act coverage (which resulted in a record $40 billion surge in healthcare-services spending), 1Q GDP contracted by 2 percent.

Doug Short and Steven Hansen summed up the BEA report with, “the Q1 GDP Second Estimate of -1.0 percent was well below forecasts, although it's likely that mainstream economists will continue to write off the weakness as a transient result of a severe winter.” Many, perhaps, but not all. For example: “There is clearly more to the economy’s unexpected weak start to 2014 than the harsh winter weather that hit the east coast earlier this year and a reduction in inventory building,” said Mark Vitner, senior economist at Wells Fargo Securities. Vitner is among those pointing to sustained weakness in business investment, and noting that consumer spending was driven by higher health-care outlays (mentioned above) and bigger heating and electricity bills. They doubt the economy will continue to grow at a rapid pace once pent-up 2Q demand is met.

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.

April 2014 U.S. Home Sales, Inventory and Prices

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Sales of new single-family homes rose by a seasonally adjusted and annualized rate (SAAR) of 26,000 units (6.4 percent) to 433,000 in April. Sales were 4.7 percent below year-earlier levels, however. Meanwhile, the median price of new homes sold fell (by $5,900 or -2.1 percent) to $275,800. Although single-family starts increased more slowly than sales during April, the three-month average starts-to-sales ratio rose to 1.48 (from 1.40). Click here for our post on April housing permits, starts and completions.

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Single-unit completions dipped (15,000 units or -2.4 percent) in April. Even so, new-home inventory rose in absolute terms (+1,000 units) but declined in months-of-inventory terms (-0.3 month). 

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Existing home sales moved higher in April, by 60,000 units (1.3 percent) to 4.65 million units (SAAR). The share of total sales comprised of new homes retreated below 8 percent. The median price of previously owned homes sold in April increased (by $5,000 or 2.5 percent), to $201,700. Inventory of existing homes jumped in both absolute (+330,000 units) and months-of-inventory (+0.8 month) terms.

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Housing affordability dipped in March because the median price of existing homes for sale rose by $9,400 to $198,200. Concurrently, Standard & Poor’s reported that the 20-City Composite in the S&P/Case-Shiller Home Price indices posted a not-seasonally adjusted monthly change of +0.9 percent in March (+12.4 percent relative to a year earlier).

“The year-over-year changes suggest that prices are rising more slowly,” observed David Blitzer, Chair of the Index Committee at S&P Dow Jones Indices. “Annual price increases for the two Composites have slowed in the last four months and 13 cities saw annual price changes moderate in March. The National Index also showed decelerating gains in the last quarter. Among those markets seeing substantial slowdowns in price gains were some of the leading boom-bust markets including Las Vegas, Los Angeles, Phoenix, San Francisco and Tampa….

“Housing indicators remain mixed. April housing starts recovered the drop in March but virtually all the gain was in apartment construction, not single family homes. New home sales also rebounded from recent weakness but remain soft. Mortgage rates are near a seven month low but recent comments from the Fed point to bank lending standards as a problem. Other comments include arguments that student loan debt is preventing many potential first time buyers from entering the housing market.” 

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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.

March 2014 International Trade (Pulp, Paper & Paperboard)

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Net Exports turned higher in March after February’s drop, with both exports and imports separately posting increases. Exports erased February’s decline while imports posted the strongest monthly performance since August 2013. Despite the strong showing by U.S. pulp, paper, and paperboard exports (over 11 percent increase), due to the big increase in imports (over 20 percent) net exports grew by only 6.5 percent.

Exports remain locked on a negative six-month trend line while imports and net exports reversed recent trends; for imports, last month’s six-month negative trend switched positive and for net exports, last month’s six-month positive trend switched negative. Despite the pick-up in export activity in March, the general take-away from pulp, paper, and paperboard trade activity remains a slowing industry sector globally which in effect keeps more U.S. onshore in the U.S. Meanwhile, more product is being imported into the U.S., further increasing supply. This is consistent with the declining trend seen in pulp and paper sector industrial production levels.

In terms of notable shifts in country-level details:

• Pulp exports have dropped 1.8 percent compared to prior year-to-date levels. Italy accounts for 49 percent (60,000 tonnes) and China accounts for 47 percent (58,000 tonnes) of the 122,000 tonne drop. India (27,000 tonnes) and Canada (26,000 tonnes) have posted the largest year-to-date gains on an absolute basis.

• Pulp imports have dropped 2.4 percent (37,000 tonnes) compared to prior year-to-date levels. The most significant drop is from Brazil, which has fallen by nearly 17 percent from prior year-to-date imports (85,000 tonne reduction). Imports from Canada are up by just over 2 percent percent (23,000 tonnes) year-to-date compared to prior year levels. As a supply source, Indonesia has climbed from being the 12th ranked supplier during the first three months of 2013 to the 7th ranked supplier during the first three months of 2014, posting a year-to-date increase of nearly 66 percent.

• Paper and paperboard imports have expanded by nearly 14 percent (102,000 tonnes) year-to-date compared to prior year-to-date activity. Once again Canada leads the way, accounting for virtually all the increase (96,000 tonnes). However, what could be a notable development is Australia has vaulted from being the 29th ranked supplier during the first three months of 2013 to the 10th ranked supplier during the first three months of 2014, posting an eye-popping increase over 42,000% --- from 6 tonnes to 2,485 tonnes.

• Paper and paperboard exports have dropped by 5.2 percent (33,000 tonnes) on a year-to-date basis. The "loss leader" is India (18,000 tonnes) followed by Japan (5,000 tonnes). Bucking the general decline in paper and paperboard exports, paper and paperboard exports to Canada are up by 18,000 tonnes. Costa Rica and Peru are receiving higher levels of U.S. paper and paperboard exports; Costa Rica's YTD receipts are up by over 9,000 tonnes and Peru's up over 5,000 tonnes. 

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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.

May 2014 Macro Pulse -- When Does a Recovery Stop Being a Recovery?

As of June 2014, five years (60 months) will have passed since the official end of the Great Recession in June 2009. The average post-WWII expansion lasted 58.4 months (median = 45 months), with a range between 12 and 120 months. In terms of longevity, then, the ongoing business cycle has definitely reached middle age.

The term “recovery” refers to the initial phase of a business expansion when the economy is growing vibrantly following the business cycle trough (i.e., end of recession). By most metrics, this recovery has been tepid. GDP growth, for example, typically “rockets out of the gate” during the first quarter after the end of a recession (average = 7.3 percent) and then gradually loses steam. The current business cycle, by contrast, posted a beginning-quarter expansion of only 1.3 percent, then meandered aimlessly (the economy actually shrank by 1.3 percent in 1Q2011) before finally hitting a post-recession high of 4.9 percent 30 months later (in 4Q2011). Someone coined the term “trampoline economy” to describe the up-one-quarter-down-the-next behavior.

So, we return to our title question: When does a recovery stop being referred to as a “recovery?” What term should be used when the normal post-recession vibrancy is essentially lacking? And can one describe what is likely to be the “downhill” half of a business expansion as a “recovery?” 

Click here to read the rest of the May 2014 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.

April 2014 Residential Permits, Starts and Completions

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Total housing starts rose noticeably in April, to a seasonally adjusted and annualized rate (SAAR) of 1.072 million units. That was 125,000 more units (26.4 percent) than March’s 947,000, and just 3.0 percent below November’s peak of 1.101 million units. The multi-family component contributed virtually all of the increase (120,000 units or 39.6 percent); the single-family component edged up by 5,000 units (0.8 percent).

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The year-over-year percentage change in total starts popped back into positive territory in April, rising to 24.4 percent. Single-family starts were 8.7 percent above year-earlier levels; the more volatile multi-family component jumped 65.7 percent. 

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Completions edged lower (-34,000 units or 3.9 percent) in April, to 847,000 units SAAR. The decrease occurred in both the single-family (-15,000 units) and multi-family (-19,000 units) components. Total completions were 18.9 percent above year-earlier levels. 

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Total permits advanced by 80,000 units (8.0 percent) SAAR, to 1.080 million in April -- the highest level since June 2008. The increase occurred almost entirely in the multi-family component (78,000 units or 19.5 percent); single-family permits were nearly flat (+2,000 units or 0.3 percent). Total permits were 3.8 percent higher than year-earlier levels. The multi-family component was 14.4 percent higher than April 2013 but the single-family component was 3.2 percent lower.

The rate of growth in total permits extended the slowing trend seen since late 2012 despite April’s positive monthly and annual percentage changes. Builder confidence seemed to better reflect trends in the market for single-family homes. The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) fell one point in May, to 45, from a downwardly revised April reading of 46. “After four months in which the HMI has shown little signs of fluctuation, it is clear that builder sentiment is becoming more in line with the market reality of a continuing but modest recovery,” said NAHB Chair Kevin Kelly. 

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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.

April 2014 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 0.3 percent in April. Over the last 12 months, the all items index increased 2.0 percent before seasonal adjustment. The indexes for gasoline, shelter, and food all rose in April and contributed to the seasonally adjusted all items increase. The gasoline index rose 2.3 percent; this led to the first increase in the energy index since January, despite declines in the electricity and fuel oil indexes. The food index rose 0.4 percent for the third month in a row, as the index for meats rose sharply.

The index for all items less food and energy rose 0.2 percent in April, with most of its major components posting increases, including shelter, medical care, airline fares, new vehicles, used cars and trucks, and recreation.

The all items index increased 2.0 percent over the last 12 months, the largest 12-month increase since July. The index for all items less food and energy has increased 1.8 percent over the last 12 months. The energy index has risen 3.3 percent, and the food index has advanced 1.9 percent over that time frame.

The seasonally adjusted Producer Price Index for final demand advanced 0.6 percent in April. On an unadjusted basis, the index for final demand moved up 2.1 percent for the 12 months ended in April, the largest 12-month advance since a 2.4 percent increase in March 2012.

In April, the 0.6 percent increase in final demand prices can be traced to the indexes for final demand services and final demand goods, both of which also advanced 0.6 percent. Within intermediate demand, the index for processed goods was unchanged; prices for unprocessed goods climbed 0.4 percent, and the index for services inched up 0.1 percent.

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The price indices we track were mixed relative to March. Compared to a year earlier, all indices were higher except for Softwood Lumber. 

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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.

April 2014 Industrial Production, Capacity Utilization and Capacity

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Industrial production decreased 0.6 percent in April 2014 after having risen about 1 percent in both February and March. In April, manufacturing output fell 0.4 percent. The index had increased substantially in February and March following a decrease in January; severe weather had restrained production early in the quarter. The output of utilities dropped 5.3 percent in April, as demand for heating returned toward normal levels. At 102.7 percent of its 2007 average, total industrial production in April was 3.5 percent above its level of a year earlier.

Wood Products output rose by 1.8 percent while Paper inched up by 0.3 percent. 

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The capacity utilization rate for total industry decreased 0.7 percentage point in April to 78.6 percent, a rate that is 1.5 percentage points below its long-run (1972–2013) average. Wood Products capacity utilization increased by 1.5 percent, and Paper 0.4 percent.

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Capacity at the all-industries and manufacturing levels both moved higher by 0.2 in April. Wood Products appears to have definitely turned a corner; capacity increased by 0.3 percent. Paper, on the other hand, contracted by 0.1 percent to another new low.

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.

March 2014 International Trade (Softwood Lumber)

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Softwood lumber exports increased by 4 MMBF (2.5 percent) in March while imports jumped by 150 MMBF (17.5 percent). Exports were 22 MMBF (16.0 percent) above year-earlier levels; imports were 15 MMBF (1.4 percent) lower. 

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Asia (especially China and Japan) retained the “top spot” for U.S. softwood lumber exports in March. China was also the largest single-country destination by a wide margin; year to date (YTD), exports to China were up nearly 73 percent relative to the same period in 2013. Meanwhile, Canada was the overwhelming source of softwood lumber imports into the United States. Imports from Germany, Honduras, and Latvia increased markedly. Imports from Austria and Sweden have nearly dried up. 

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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 March. At the same time, Great Lakes customs districts (especially Duluth, MN) handled over two-thirds of the softwood lumber imports coming into the United States. 

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Douglas-fir comprised 23.0 percent of all softwood lumber exports in March, followed by Southern yellow pine with 21.1 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.

March 2014 International Trade (General)

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Total March exports of $193.9 billion and imports of $234.3 billion resulted in a goods and services deficit of $40.4 billion, down from $41.9 billion in February. March exports were $3.9 billion more than February exports of $190.0 billion. March imports were $2.5 billion more than February imports of $231.8 billion.

In March, the goods deficit decreased $0.6 billion from February to $60.7 billion, and the services surplus increased $0.9 billion from February to $20.4 billion. Exports of goods increased $3.7 billion to $135.1 billion, and imports of goods increased $3.1 billion to $195.8 billion. Exports of services increased $0.2 billion to $58.8 billion, and imports of services decreased $0.7 billion to $38.4 billion.

The goods and services deficit increased $3.8 billion from March 2013 to March 2014. Exports were up $9.2 billion, or 5.0 percent, and imports were up $13.0 billion, or 5.9 percent.

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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 0.7 percent in February while prices rose by 0.3 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.

April 2014 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil rose modestly in April, up $1.50 to $102.31 per barrel. That price rise coincided with a slightly weaker U.S. dollar, which was sufficient to offset the lagged impacts of an uptick in the amount of oil supplied -- 73,000 barrels per day (BPD), to 19.0 million BPD -- in February and continued accumulation of crude stocks. The monthly average price spread between Brent crude (the predominant grade used in Europe) and WTI narrowed by $1.28 in April, to $5.40 per barrel.

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Oil futures were falling as our data-collection period came to an end, as according to ASPO-USA, “ever-growing US crude stockpiles balanced off an ever-deteriorating Ukrainian situation.” 

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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.

April 2014 Currency Exchange Rates

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In April the monthly average value of the U.S. dollar appreciated relative to two of the three major currencies we track: 0.1 percent against both the euro and yen; the greenback depreciated 1.0 percent against Canada’s loonie. On a trade-weighted index basis, the dollar weakened by 0.4 percent against a basket of 26 currencies. 

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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.

April 2014 ISM Reports

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According to the Institute for Supply Management’s (ISM) monthly opinion survey, expansion of economic activity in the U.S. manufacturing sector expanded again in April. The PMI registered 54.9 percent, an increase of 1.2 percentage points from March's 53.7 percent (50 percent is the breakpoint between contraction and expansion). ISM’s manufacturing survey represents under 10 percent of U.S. employment and about 20 percent of the overall economy. Continued growth in the export and import sub-indices were the main sources of support for the idea of improving conditions.

“Comments from the [respondent] panel generally remain positive,” said Bradley Holcomb, chair of ISM’s Manufacturing Business Survey Committee; “however, some expressed concern about international economic and political issues potentially impacting demand.”

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Wood Products expanded in April, thanks to gains in employment. Paper Products grew, with widespread support among the sub-indices.

The non-manufacturing sector, which accounts for 80 percent of the economy and 90 percent of employment, picked up the pace of expansion in April. The NMI registered 55.2 percent, 2.1 percentage points higher than March’s 53.1 percent. Two sub-indexes in the NMI – the Business Activity Index (“Overall activity” in the table below) and the New Orders Index – have good correlations to the economy; both grew faster.

“The majority of survey respondents' comments indicate that both business conditions and the economy are improving,” said Anthony Nieves, chair of ISM’s Non-Manufacturing Business Survey Committee.

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All three of the individual service industries we track expanded in April, with near-universal improvement in employment and orders (whether new, backlogged and import/export).

Commodities up in price included lumber, building materials, wood pallets, diesel and gasoline, copier paper, paper products, and natural gas. Commodities down in price included spruce studs. 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.

March 2014 Manufacturers’ Shipments, Inventories, and New & Unfilled Orders

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According to the U.S. Census Bureau, the value of manufactured-goods shipments increased $1.4 billion or 0.3 percent to $494.9 billion in March. This was at the highest level since the series was first published on a NAICS basis in 1992 and followed a 0.9 percent February increase. Shipments of durable goods increased $2.8 billion or 1.2 percent to $237.1 billion, led by transportation equipment. Meanwhile, nondurable goods shipments decreased $1.4 billion or 0.6 percent to $257.9 billion, led by petroleum and coal products. Wood shipments rose by 1.1 percent while Paper shipments slipped by -0.1 percent.

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Inventories increased $0.6 billion or 0.1 percent to $643.1 billion (the highest level since the series was first published on a NAICS basis). The inventories-to-shipments ratio was 1.30, unchanged from February.

Inventories of durable goods increased $1.2 billion or 0.3 percent to $393.3 billion, led by transportation equipment. Nondurable goods inventories decreased $0.6 billion or 0.2 percent to $249.7 billion, led by petroleum and coal products. Wood inventories rose by 0.6 percent, while Paper followed behind with a 0.4 percent increase. 

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New orders increased $5.3 billion or 1.1 percent to $493.9 billion; excluding transportation, new orders increased 0.6 percent. Durable goods orders increased $6.7 billion or 2.9 percent to $236.0 billion, led by transportation equipment. New orders for nondurable goods decreased $1.4 billion or 0.6 percent to $257.9 billion.

As can be seen in the graph above, real (inflation-adjusted) new orders have been essentially flat since early 2012, and have recouped a little more than two-thirds the losses incurred since the beginning of the Great Recession. 

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Unfilled durable-goods orders increased $6.9 billion or 0.6 percent to a new nominal high of $1,069.3 billion, led by transportation equipment. The unfilled orders-to-shipments ratio was 6.44, down from 6.49 in February. Real unfilled orders, a good litmus test for sector growth, show a much different picture; in real terms, unfilled orders have regained less than 70 percent of 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.