2Q2014 Gross Domestic Product: First (Advance) Estimate

Click image for larger version

According to the Bureau of Economic Analysis (BEA), the “advance” estimate of 2Q2014 growth in real U.S. gross domestic product (GDP) expanded at a seasonally adjusted and annualized rate of 4.0 percent. The 2Q rate of expansion is 6.0 percentage points above the 1Q’s -2.1 percent contraction (itself revised upward by 0.8 percentage point from the previously reported -2.9 percent). This is the largest positive quarter-to-quarter improvement in GDP growth in roughly 14 years. Three of the four categories -- personal consumption expenditures (PCE), private domestic investment (PDI), and government consumption expenditures (GCE) -- contributed to 2Q growth; net exports (NetX) subtracted from growth.

The largest contributions to the 2Q turnaround came from:

·     Inventories (+2.8 percentage points from 1Q),

·     Exports (+2.5 percent),

·     Consumer goods expenditures (+1.2 percent), and

·     Commercial fixed investments (+0.9 percent).

Those positive quarter-to-quarter contribution were partially offset by:

·     Imports (-1.5 percentage points) and

·     Consumer expenditures for services (-0.3 percent).

Click image for larger version

For this report the BEA assumed annualized net aggregate inflation of 1.9 percent. By way of comparison, the growth rate of the Bureau of Labor Statistics’ concurrent seasonally adjusted CPI-U index was 3.5 percent (annualized); meanwhile, the price index reported by the Billion Prices Project (BPP) was 2.7 percent. Were the BEA’s nominal estimates corrected for inflation using the CPI-U, 2Q real GDP would have grown by 2.5 percent; if using the BPP inflation rate, growth would have been 3.3 percent.

Much as we welcome the pickup in growth, and would like to believe Fed Chair Janet Yellen is correct when asserting that “economic activity is rebounding,” several details prevent us from wholeheartedly embracing that idea:

·     Advance GDP estimates have typically turned out to be little better than “wild guesses.” The first quarter of 2014 was a prime example of this; the advance estimate of +0.1 percent was subsequently revised to -1.0 percent, then -2.9 percent, and finally (as part of the BEA’s annual revisions) to -2.1 percent. Granted, it is possible future revisions will show an even greater rate of 2Q growth (one analyst predicts 5.0+ percent), but we remain skeptical.

·     As we have mentioned many times before, inventories are ultimately a zero-sum game. Consumer Metrics Institute observes that inventories are also highly volatile -- because of both business cycle factors and the BEA's inventory measurement-and-valuation methodologies. Consequently, the BEA removes inventories from its "bottom line" indicator of real final sales of domestic product. By that measure, the economy was growing at a much more modest 2.3 percent -- one reason why The Wall Street Journal dubbed 2Q as “still a 2 percent growth economy.”

We intend to wait until the dust from upcoming revisions has settled before entertaining thoughts of festivities to celebrate the stronger GDP 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.

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

Click image for larger view 

Click image for larger view

Sales of new single-family homes tumbled by a seasonally adjusted and annualized rate (SAAR) of 36,000 units (-8.1 percent), to 406,000 in June. That decline was in addition to the largest-ever downward revision (from 504,000 to 442,000 units, or 12.3 percent) applied to May’s sales. Sales in June were 11.6 percent below year-earlier levels. Meanwhile, the median price of new homes sold fell (by $9,100 or 3.2 percent) to $273,500. Because single-family starts dropped more quickly than sales, the three-month average starts-to-sales ratio retreated to 1.48 (from 1.53). Click here for our post on June’s housing permits, starts and completions. 

Click image for larger view

Single-unit completions retreated (-41,000 units or 6.5 percent) in June. Even so, new-home inventory expanded in both absolute and months-of-inventory terms (6,000 units or 0.6 month). 

Click image for larger view

Existing home sales advanced in June, by 130,000 units (2.6 percent) to 5.04 million units (SAAR). The share of total sales comprised of new homes fell to 7.5 percent. The median price of previously owned homes sold in June rose (by $11,300 or 5.3 percent) to $223,300. Inventory of existing homes jumped in absolute terms (+50,000 units) but was unchanged in months-of-inventory terms. 

Click image for larger view

Housing affordability dipped further in May because the median price of existing homes for sale rose by $12,600 to $213,600. 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 +1.1 percent in May (+9.3 percent relative to a year earlier).

“Home prices rose at their slowest pace since February of last year,” observed David Blitzer, Chair of the Index Committee at S&P Dow Jones Indices. “The 10- and 20-City Composites posted just over 9 percent, well below expectations. Month-to-month, all cities are posting gains before seasonal adjustment; after seasonal adjustment 14 of 20 were lower” (emphasis added).

“Year-over-year, nine cities -- Las Vegas (16.9%), San Francisco (15.4%), Miami (13.2%), San Diego (12.4%), Los Angeles (12.3%), Detroit (11.9%), Atlanta (11.2%), Tampa (10.2%) and Portland (10.0%) -- posted double-digit increases in May 2014. The Sun Belt continues to lead with seven of the top eight performing cities. Eighteen of 20 cities had lower year-over-year numbers than last month; San Francisco and San Diego saw their year-over-year figures decelerate by about three percentage points.

“Housing has been turning in mixed economic numbers in the last few months. Prices and sales of existing homes have shown improvement while construction and sales of new homes continue to lag. At the same time, the broader economy and especially employment are showing larger improvements and substantial gains.” 

Click image for larger view

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 2014 Consumer and Producer Price Indices (incl. Forest Products)

Click image for larger version

The seasonally adjusted Consumer Price Index for All Urban Consumers (CPI-U) increased 0.3 percent in June. In contrast to May’s broad-based increase, the June seasonally adjusted increase in the all items index was primarily concentrated in the gasoline index. It rose 3.3 percent and accounted for two-thirds of the all items increase. Other energy indexes were mixed, with the electricity index rising, but the indexes for natural gas and fuel oil declining. The food index decelerated in June, rising only slightly, with the food at home index flat after recent increases.

The index for all items less food and energy also decelerated in June, increasing 0.1 percent after a 0.3 percent increase in May. The indexes for shelter, apparel, medical care, and tobacco all increased in June, and the index for household furnishings and operations rose for the first time in a year. However, the index for new vehicles declined after recent increases, and the index for used cars and trucks also fell.

The all items index increased 2.1 percent over the last 12 months, the same figure as for the 12 months ending May. The index for all items less food and energy rose 1.9 percent over the last 12 months, a slight decline from the 2.0 percent figure last month. The index for energy increased 3.2 percent over the span, and the food index rose 2.3 percent.

The seasonally adjusted Producer Price Index for final demand rose 0.4 percent in June. This increase followed a 0.2 percent decline in May and a 0.6 percent advance in April. On an unadjusted basis, the index for final demand moved up 1.9 percent for the 12 months ended in June.

In June, the 0.4 percent increase in final demand prices can be traced to a 0.5 percent advance in the index for final demand goods and a 0.3 percent rise in prices for final demand services.

Within intermediate demand, prices for processed goods advanced 0.4 percent, the index for unprocessed goods fell 0.9 percent, and prices for services moved up 0.6 percent. 

Click image for larger version

The price indices we track were mixed relative to May. Compared to a year earlier, all indices were higher. The indices for Intermediate Materials; Pulp, Paper & Allied Products; and Lumber & Wood Products set new highs in June. 

Click image for larger version

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 2014 Residential Permits, Starts and Completions

Click image for larger view 

Click image for larger view

Total housing starts retreated in June, to a seasonally adjusted and annualized rate (SAAR) of 0.893 million units. That was 92,000 fewer units (-9.3 percent) than May’s 0.985 million, and 19.2 percent below November’s peak of 1.105 million units. The preponderance of the decrease occurred in the single family component (-57,000 units or 9.0 percent); multi-family: -35,000 units (9.9 percent). 

Click image for larger view

The year-over-year percentage change in total starts slowed again in June, falling to 5.6 percent. Single-family starts were 3.9 percent below year-earlier levels; the more volatile multi-family component jumped up to 34.8 percent, however. 

Click image for larger view

Click image for larger view

Completions dropped by 108,000 units (-12.0 percent) in June, to 789,000 units SAAR. The multi-family component dominated the decrease (-67,000 units or 24.8 percent); single-family completions: -41,000 units or 6.5 percent. Total completions were 4.8 percent above year-earlier levels, however. 

Click image for larger view 

Click image for larger view

Total permits retreated by 42,000 units (-4.2 percent) SAAR, to 963,000 in June. The decrease occurred entirely in the multi-family component (-58,000 units or 14.9 percent). Single-family permits rose by 16,000 units (2.6 percent). Total permits were 6.7 percent above year-earlier levels -- single- and multi-family components were, respectively, 5.9 and 8.1 percent higher.

Time will tell whether June marked an end to the slide in the rate of annual growth in total permits seen since late 2012. It may, as the latest National Association of Home Builders/Wells Fargo Housing Market Index (HMI) rose four points in July, to 53. An index value above 50 means more builders feel the market is good than feel it is poor. “This is the first time that builder confidence has been above 50 since January and an important sign that it is strengthening as pent-up demand brings more buyers into the marketplace,” said NAHB Chairman Kevin Kelly. 

Click image for larger view

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 2014 Industrial Production, Capacity Utilization and Capacity

Click image for larger version

Industrial production rose 0.2 percent in June after having risen 0.5 percent in May. The increase in May was previously reported to have been 0.6 percent. Manufacturing output increased 0.1 percent in June after having moved up 0.5 percent in the previous month. At 103.9 percent of its 2007 average, total industrial production in June was 4.3 percent above its level of a year earlier.

Wood Products and Paper output both rose by 0.3 percent. 

Click image for larger version 

Click image for larger version

Click image for larger version

The capacity utilization rate for total industry decreased less than 0.1 percentage point in June to 79.1 percent, a rate that is 1.0 percentage point below its long-run (1972–2013) average. Wood Products capacity utilization decreased by 1.3 percent, but Paper rose by 0.6 percent. 

Click image for larger version

Capacity at the all-industries and manufacturing levels moved higher by, respectively, 0.3 and 0.2 percent in June. Wood Products extended its nearly year-long trend when increasing by 0.4 percent. Paper, on the other hand, contracted by 0.2 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.

July 2014 Macro Pulse -- From Bad to Worse

In June’s Macro Pulse report, we chronicled that the Bureau of Economic Analysis (BEA) had slashed its estimate of 1Q2014 GDP growth from an initial, seasonally adjusted and annualized rate (SAAR) of +0.1 percent (relative to 4Q2013) to -1.0 percent. We now know, thanks to the second revision, that the -1.0 percent estimate was overly optimistic; the BEA now pegs the contraction at -2.9 percent -- the fastest rate of contraction in five years, and 7.0 percentage points lower than in 3Q2013.

Unusually cold winter weather is the most popular scapegoat for the poor 1Q showing. As highlighted in our June 26 GDP blog post, however,…

Click here to read the rest of the July 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.

May 2014 International Trade (Softwood Lumber)

Click image for larger view

Softwood lumber exports decreased by 14 MMBF (8.5 percent) in May while imports rose by 103 MMBF (9.7 percent). Exports were 3 MMBF (2.3 percent) below year-earlier levels; imports were 160 MMBF (15.9 percent) higher. 

Click image for larger view

Asia (especially China and Japan) was the primary destination for U.S. softwood lumber exports in May. China was also the largest single-country destination; year to date (YTD), exports to China were up over 54 percent relative to the same period in 2013. Meanwhile, Canada was the overwhelming source of softwood lumber imports into the United States. Overall, exports were up 12.1 percent YTD compared to the same period in 2013, while imports were up 5.9 percent. 

Click image for larger view 

Click image for larger view

Roughly 44 percent of U.S. softwood lumber exports left the country through West Coast (primarily Seattle, WA) customs districts in May. 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. 

Click image for larger view 

Click image for larger view

Southern yellow pine comprised 24.7 percent of all softwood lumber exports in May, followed by Douglas-fir with 21.3 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.

May 2014 International Trade (General)

Click image for larger view

Total May exports of $195.5 billion and imports of $239.8 billion resulted in a goods and services deficit of $44.4 billion, down from $47.0 billion in April. May exports were $2.0 billion more than April exports of $193.5 billion. May imports were $0.7 billion less than April imports of $240.5 billion.

In May, the goods deficit decreased $2.4 billion from April to $63.3 billion, and the services surplus increased $0.3 billion from April to $18.9 billion. Exports of goods increased $1.6 billion to $136.7 billion, and imports of goods decreased $0.7 billion to $200.0 billion. Exports of services increased $0.3 billion to $58.8 billion, and imports of services were virtually unchanged at $39.9 billion.

The goods and services deficit decreased $0.4 billion from May 2013 to May 2014. Exports were up $8.3 billion, or 4.4 percent, and imports were up $7.8 billion, or 3.4 percent.

Alarmingly, if petroleum exports are excluded, the U.S. trade deficit hit $49 billion dollars in May, the highest real trade deficit ever recorded.

Click image for larger view

On a global scale, data compiled by the Netherlands Bureau for Economic Policy Analysis showed that world trade volume increased by 1.3 percent in April 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.

June 2014 ISM Reports

Click image for larger version

The Institute for Supply Management’s (ISM) monthly opinion survey showed that expansion of economic activity in the U.S. manufacturing sector slowed slightly in June. The PMI registered 55.3 percent, a decrease of 0.1 percentage point from May's 55.4 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. Jumps in the new-orders and imports sub-indices were the main sources of support for the expansion. 

Click image for larger version

Wood Products and Paper Products expanded in June -- although in the case of Wood Products, the only contribution came from new orders. Paper Products exhibited much greater support among the sub-indices. “Orders are picking up, but pricing has declined in last month," wrote one Wood Products respondent. “Not the norm for this time of year.”

The pace of expansion in the non-manufacturing sector, which accounts for 80 percent of the economy and 90 percent of employment, also edged down in June. The NMI registered 56.0 percent, 0.3 percentage point lower than May’s 56.3 percent. Two sub-indices 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 expanded in June.

“Respondents’ comments vary by industry and company,” said Anthony Nieves, chair of ISM’s Non-Manufacturing Business Survey Committee; “however, the majority indicate that steady economic growth is continuing.” 

Click image for larger version

All three of the individual service industries we track expanded in June; moreover, all of the respective sub-indices were either unchanged or increased. One Construction respondent indicated the “industry is extremely strong [and] business conditions look positive going forward.”

Commodities up in price included gasoline and diesel, lumber, paper, and natural gas. No relevant commodities were down in price. Wood pallets were once again 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 2014 Monthly Average Crude Oil Price

Click image for larger view

The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil rose by the most since December 2013, up $3.49 to $105.79 per barrel. That price rise occurred despite a slightly stronger U.S. dollar and the lagged impacts of an increase in the amount of oil supplied in April -- 257,000 barrels per day (BPD), to 19.0 million BPD; it coincided with further contractions in crude stocks, however. The monthly average price spread between Brent crude (the predominant grade used in Europe) and WTI narrowed by $1.24 in June, to $6.00 per barrel.

Click image for larger view

Click image for larger view

The increase in oil futures prices was attributed to a combination of President Obama commenting that “the crisis in Iraq will be long lasting,” the deployment of U.S. military assessment teams to Iraq, and the Obama administration’s clearing the way for the first exports of unrefined American oil in four decades.

Click image for larger view

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 Manufacturers’ Shipments, Inventories, and New & Unfilled Orders

Click image for larger view 

Click image for larger view

According to the U.S. Census Bureau, the value of manufactured-goods shipments increased $0.3 billion or 0.1 percent to $498.3 billion in May. This was at the highest level since the series was first published on a NAICS basis in 1992 and followed a 0.4 percent April increase. Shipments of durable goods increased $0.8 billion or 0.3 percent to $238.9 billion, led by primary metals. Meanwhile, nondurable goods shipments decreased $0.5 billion or 0.2 percent to $259.3 billion, led by chemical products. Wood shipments rose by 1.8 percent while Paper shipments nudged up by 0.2 percent.

Click image for larger view

Inventories increased $5.0 billion or 0.8 percent to $651.5 billion (the highest level since the series was first published on a NAICS basis). The inventories-to-shipments ratio was 1.31, up from 1.30 in April.

Inventories of durable goods increased $3.6 billion or 0.9 percent to $397.5 billion, led by transportation equipment. Nondurable goods inventories increased $1.5 billion or 0.6 percent to $254.0 billion, led by petroleum and coal products. Inventories of both Wood and Paper were unchanged. 

Click image for larger view

New orders decreased $2.6 billion or 0.5 percent to $497.7 billion; excluding transportation, new orders decreased 0.1 percent. Durable goods orders decreased $2.2 billion or 0.9 percent to $238.3 billion, led by transportation equipment. New orders for nondurable goods decreased $0.5 billion or 0.2 percent to $259.3 billion.

As can be seen in the graph above, real (inflation-adjusted) new orders have been essentially flat since early 2012, and have recouped 71 percent of the losses incurred since the beginning of the Great Recession. 

Click image for larger view

Unfilled durable-goods orders increased $6.7 billion or 0.6 percent to a new nominal high of $1,087.4 billion, led by transportation equipment. The unfilled orders-to-shipments ratio was 6.51, up from 6.47 in April. Real unfilled orders, a good litmus test for sector growth, show a much different picture; in real terms, unfilled orders have regained just three-quarters 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.

May 2014 U.S. Construction Spending

Click image for larger view 

Click image for larger view

Overall construction spending in the United States edged up by 0.1 percent during May, to a seasonally adjusted and annualized rate (SAAR) of $956.1 billion -- the highest level since March 2009. The combination of a $3.6 billion (1.1 percent) jump in private non-residential and $2.8 billion (1.0 percent) rise in public spending contributed to the overall increase. Private residential spending tumbled by $5.3 billion (0.3 percent).

Click image for larger view

Click here for a discussion of May’s new residential permits, starts and completions. Click here for a discussion of new and existing home sales, inventory and prices.

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.