2Q2014 Gross Domestic Product: Second (Preliminary) Estimate

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According to the Bureau of Economic Analysis (BEA), the “preliminary” estimate of 2Q2014 growth in real U.S. gross domestic product (GDP) expanded at a seasonally adjusted and annualized rate of 4.2 percent. The revised 2Q rate of expansion is 0.2 percentage point faster than the initial (“advance”) estimate, and 6.3 percentage points above 1Q’s 2.1 percent contraction. 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 positive revisions to the headline number came from:

·     Commercial fixed investments (+0.34 percentage point relative to the “advance” 2Q estimate),

·     Imports (+0.11 percentage point),

·     Exports (+0.08 percentage point) and

·     Consumer expenditures for services (+0.09 percentage point).

The increase in consumer services spending was mostly offset by reduced spending for consumer goods (-0.08 percentage point); the improvement in fixed investment was partially offset by reduced inventory accumulation (-0.27 percentage point), although inventories remained the single largest contributor to the headline number.

Growth in real final sales of domestic product, the BEA’s “bottom line” indicator of economic health (which excludes the ever-volatile inventories) improved by about a half percentage point, to +2.79 percent.

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For this report the BEA assumed annualized net aggregate inflation of 2.2 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 2.9 percent; if using the BPP inflation rate, growth would have been 3.7 percent.

Although we do not want to be guilty of looking for a cloud in the “silver lining,” we continue to question whether the U.S. economy is truly chugging along as strongly as the GDP estimate might suggest. Points to ponder along that vein include:

·     Inventories tend to create a zero-sum game over the long haul. The second quarter’s inventory growth was essentially the “flip side” of 1Q’s contraction.

·     The surge in goods exports (from subtracting 1.18 percentage points from the 1Q headline number to adding 1.22 percentage points in 2Q) seems strange in the context of apparent softening economic growth among the United States’ major trading partners.

·     Our own perception is the economy did not feel like it was growing 6.3 percentage points faster in 2Q than 1Q. 

One must decide whether that phenomenal turnaround in just 90 days is genuine, or “a sign of seriously noisy numbers momentarily pointing towards implausible and/or unsustainable 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.

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

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Sales of new single-family homes retreated by 10,000 units (-2.4 percent), to a seasonally adjusted and annualized rate (SAAR) of 412,000 in July. Despite the month-to-month decline, sales in July were 12.1 percent above year-earlier levels. Meanwhile, the median price of new homes sold fell (by $10,300 or 3.7 percent) to $269,800. Although single-family starts increased while sales fell, the three-month average starts-to-sales ratio was essentially unchanged at 1.47. Click here for our post on June’s housing permits, starts and completions.

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Single-unit completions rose (37,000 units or 6.2 percent) in July. As a result, new-home inventory expanded in both absolute and months-of-inventory terms (8,000 units or 0.5 month). 

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Existing home sales advanced in July, by 120,000 units (2.4 percent) to 5.15 million units (SAAR). With sales of existing homes rising but new homes falling, the share of total sales comprised of new homes shrank to 7.4 percent. The median price of previously owned homes sold in June inched higher (by $900 or 0.4 percent) to $222,900. Inventory of existing homes increased in absolute terms (+80,000 units) but was unchanged in months-of-inventory terms.

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Housing affordability tumbled in June, to its lowest level since November 2008, because the median price of existing homes for sale rose by $12,300 to $224,300. Concurrently, Standard & Poor’s reported that the newly published U.S. National Index in the S&P/Case-Shiller Home Price indices posted a not-seasonally adjusted monthly change of +0.9 percent in June (+6.2 percent relative to a year earlier).

“Home price gains continue to ease as they have since last fall,” observed David Blitzer, Chair of the Index Committee at S&P Dow Jones Indices. “For the first time since February 2008, all cities showed lower annual rates than the previous month. Other housing indicators -- starts, existing home sales and builders’ sentiment -- are positive. Taken together, these point to a more normal housing sector.

“The monthly National Index rose 0.9% in June. While all 20 cities saw higher home prices over the last 12 months, all experienced slower gains. In San Francisco, the pace of price increases halved since late last summer. The Sun Belt cities -- Las Vegas, Phoenix, Miami and Tampa -- all remain a third or more below their peak prices set almost a decade ago.

“Bargain basement mortgage rates won’t continue forever; recent improvements in the labor markets and comments from Fed chair Janet Yellen and others hint that interest rates could rise as soon as the first quarter of 2015. Rising mortgage rates won’t send housing into a tailspin, but will further dampen price gains.” 

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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 2014 Residential Permits, Starts and Completions

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Total housing starts advanced noticeably in July, to a seasonally adjusted and annualized rate (SAAR) of 1.093 million units -- the fastest rate since November 2013. That level was 148,000 more units (15.7 percent) than June’s 945,000 (upwardly revised from the initial estimate of 893,000), and just 1.1 percent below November’s peak of 1.105 million units. Nearly two-thirds of the total increase occurred in the multi-family component (98,000 units or 28.9 percent); single-family starts rose by 50,000 units (8.3 percent). 

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Unsurprisingly, the year-over-year percentage change in total starts also picked up speed in July, jumping to 20.2 percent. Single-family starts were 7.3 percent above their year-earlier level; the more volatile multi-family component surged to 48.1 percent above its July 2013 level. 

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Completions increased by 30,000 units (3.7 percent) in July, to 841,000 units SAAR. All of the increase occurred in the single-family component (+37,000 units or 6.2 percent) as the multi-family component decreased (-7,000 units or 3.3 percent). Total completions were 5.2 percent above their year-earlier level. 

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Total permits rose by 79,000 units (8.1 percent), to 1.052 million SAAR in July. Similar to the case with starts, the increase occurred almost entirely in the multi-family component (73,000 units or 21.5 percent). Single-family permits inched higher (6,000 units or 0.9 percent). Total permits were 7.6 percent above year-earlier levels -- single- and multi-family components were, respectively, 3.9 and 14.6 percent higher.

It is still too early to tell whether the slide in the rate of annual growth in total permits seen since late 2012 has come to an end. That may be the case, as the latest National Association of Home Builders/Wells Fargo Housing Market Index (HMI) rose two points in August, to 55; this third consecutive monthly gain brings the index to its highest level since January. An index value above 50 means more builders feel the market is good than feel it is poor. 

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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 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 0.1 percent in July. The all items index posted its smallest seasonally adjusted increase since February; the indexes for shelter and food rose, but were partially offset by declines in the energy index and the index for airline fares. The food index rose 0.4 percent in July; the decrease in the energy index was its first since March and reflected declines in the indexes of all the major energy components.

The all items index increased 2.0 percent over the last 12 months, a slight decline from the 2.1 percent figure for the 12 months ending June. The index for all items less food and energy rose 1.9 percent over the last 12 months, the same figure as for the 12 months ending June. The energy index has increased 2.6 percent, and the food index has risen 2.5 percent over the span.

The seasonally adjusted Producer Price Index for final demand rose 0.1 percent in July. This increase followed a 0.4-percent advance in June and a 0.2-percent decline in May. On an unadjusted basis, the index for final demand climbed 1.7 percent for the 12 months ended in July.

In July, the 0.1 percent increase in final demand prices can be traced to the index for final demand services, especially truck transportation of freight. Prices for final demand goods were unchanged, as a 0.2 percent rise in the index for “core” goods (i.e., less foods and energy) and a 0.4 percent increase in prices for foods offset a 0.6 percent decline in the index for energy. 

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

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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.

August 2014 Macro Pulse -- Still a Two Percent Growth Economy

That was American Action Forum President Douglas Holtz-Eakin’s reaction to the news that 2Q2014 real gross domestic product (GDP) grew at a seasonally adjusted and annualized rate (SAAR) of 4.0 percent. Holtz-Eakin’s assessment stemmed from the observation that, although the 4 percent headline growth rate represented the largest positive quarter-to-quarter GDP change in nearly 14 years, inventory accumulation accounted for nearly half of the increase. Because inventories are so volatile, the Bureau of Economic Analysis removes them from real final sales of domestic product, its “bottom-line” indicator of economic activity. By that measure, the U.S. economy grew at a much more modest 2.3 percent.

Given the unexpectedly robust GDP reading, what does the latest data indicate about how the forest products sector is faring? Find out by clicking here to read the rest of the August 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.

July 2014 Industrial Production, Capacity Utilization and Capacity

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Industrial production increased 0.4 percent in July for its sixth consecutive monthly gain. Manufacturing output advanced 1.0 percent in July, its largest increase since February. The production of motor vehicles and parts jumped 10.1 percent, while output in the rest of the manufacturing sector rose 0.4 percent. The output of utilities dropped 3.4 percent, as weather that was milder than usual for July reduced demand for air conditioning. At 104.4 percent of its 2007 average, total industrial production in July was 5.0 percent above its year-earlier level.

Wood Products and Paper output both rose by 0.3 percent. 

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Capacity utilization for total industry edged up 0.1 percentage point to 79.2 percent in July, a rate 1.7 percentage points above its level of a year earlier and 0.9 percentage point below its long-run (1972-2013) average. Wood Products capacity utilization decreased by 0.2 percent, but Paper rose by 0.5 percent. 

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Capacity at the all-industries and manufacturing levels moved higher by, respectively, 0.3 and 0.2 percent. Wood Products extended its 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.

June 2014 International Trade (Softwood Lumber)

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Softwood lumber exports decreased by 10 MMBF (6.6 percent) in June while imports fell by 33 MMBF (2.8 percent). Exports were 1 MMBF (0.6 percent) below year-earlier levels; imports were 209 MMBF (22.7 percent) higher. 

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Asia (especially China and Japan) was the primary destination for U.S. softwood lumber exports in June, although the rest of North America (i.e., Canada and Mexico) was a close second. China was also the largest single-country destination; year to date (YTD), exports to China were up over 51 percent relative to the same period in 2013. Meanwhile, Canada was the overwhelming source of softwood lumber imports into the United States. Overall, YTD exports were up 10.0 percent compared to the same period in 2013, while imports were up 8.6 percent. 

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Roughly 47 percent of U.S. softwood lumber exports left the country through West Coast (primarily Seattle, WA) customs districts in June. At the same time, Great Lakes customs districts (especially Duluth, MN) handled nearly 70 percent of the softwood lumber imports coming into the United States. 

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Douglas-fir comprised 20.8 percent of all softwood lumber exports in June, followed by Southern yellow pine with 20.3 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.

June 2014 International Trade (General)

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Total June exports of $195.9 billion and imports of $237.4 billion resulted in a goods and services deficit of $41.5 billion, down from $44.7 billion in May, revised. June exports were $0.3 billion more than May exports of $195.6 billion. June imports were $2.9 billion less than May imports of $240.3 billion.

In June, the goods deficit decreased $3.0 billion from May to $60.3 billion, and the services surplus increased $0.1 billion from May to $18.7 billion. Exports of goods increased $0.1 billion to $136.9 billion, and imports of goods decreased $2.9 billion to $197.2 billion. Exports of services increased $0.1 billion to $59.0 billion, and imports of services were virtually unchanged at $40.2 billion.

The goods and services deficit increased $5.0 billion from June 2013 to June 2014. Exports were up $5.5 billion, or 2.9 percent, and imports were up $10.5 billion, or 4.6 percent. 

Alarmingly, if petroleum exports are excluded, the U.S. trade deficit hit nearly $47 billion in June, just shy of May’s $49 billion -- the highest real ex-oil trade deficit ever recorded.

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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 0.6 percent in May while prices fell 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.

July 2014 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil eased lower in July, down $2.20 to $103.95 per barrel. That price drop occurred despite a slightly weaker U.S. dollar, the lagged impacts of a 267,000 barrel-per-day (BPD) decrease in the amount of oil supplied in May (to 18.5 million BPD), and further reductions in crude stocks. The monthly average price spread between Brent crude (the predominant grade used in Europe) and WTI shrank by $2.83 in July, to $3.18 per barrel -- the narrowest differential in a year. 

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“Traders continue to ignore the ever-growing chaos in the Middle East and the sanctions being imposed on Russia’s oil industry,” commented ASPO-USA’s Tom Whipple in response to the noticeable retreat in futures prices, “on the grounds that as yet there has been no significant reduction in global oil supplies. Instead, the markets are reacting to fundamentals such as falling demand for gasoline, inventories, and prospects for economic growth. The ‘risk premium’ has been wrung out of the oil markets in the last few weeks -- perhaps prematurely.” 

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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.

June 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 $2.5 billion or 0.5 percent to $499.8 billion in June. This was at the highest level since the series was first published on a NAICS basis in 1992 and followed a 0.1 percent May increase. Shipments of durable goods increased $0.9 billion or 0.4 percent to $239.0 billion, led by transportation equipment. Meanwhile, nondurable goods shipments increased $1.7 billion or 0.6 percent to $260.9 billion, led by petroleum and coal products. Wood shipments rose by 2.8 percent while Paper shipments fell by 1.3 percent. 

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Inventories increased $1.8 billion or 0.3 percent to $653.8 billion (the highest level since the series was first published on a NAICS basis). The inventories-to-shipments ratio was 1.31, unchanged from May.

Inventories of durable goods increased $1.6 billion or 0.4 percent to $399.6 billion, led by transportation equipment. Nondurable goods inventories increased $0.2 billion or 0.1 percent to $254.2 billion, led by petroleum and coal products. Inventories of Wood and Paper expanded, respectively, by 0.6 and 0.8 percent. 

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New orders increased $5.7 billion or 1.1 percent to $503.2 billion; excluding transportation, new orders increased 1.1 percent. Durable goods orders increased $4.0 billion or 1.7 percent to $242.4 billion, led by machinery. New orders for nondurable goods increased $1.7 billion or 0.6 percent to $260.9 billion.

As can be seen in the graph above, real (inflation-adjusted) new orders have been essentially flat since early 2012, and have recouped just under 74 percent of the losses incurred since the beginning of the Great Recession.  

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Unfilled durable-goods orders increased $10.4 billion or 1.0 percent to $1,098.5 billion, led by transportation equipment. The unfilled orders-to-shipments ratio was 6.52, up from 6.51 in May. Real unfilled orders, a good litmus test for sector growth, show a much different picture; in real terms, unfilled orders have regained roughly 78 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.

July 2014 ISM Reports

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The Institute for Supply Management’s (ISM) monthly opinion survey showed that expansion of economic activity in the U.S. manufacturing sector picked up speed (to the fastest pace in three years) in July. The PMI registered 57.1 percent, an increase of 1.8 percentage point from June's 55.3 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, production and employment sub-indices were the main sources of support for the expansion. Interestingly, the PMI’s rise appears to have resulted more from the seasonal adjustment applied to the new orders sub-index than from genuine improvement in activity. The not-seasonally adjusted new orders value for July was tied with June’s value at the lowest level since January, but the seasonal adjustment value pushed the new orders sub-index to the highest value since December.

“Comments from the panel are generally positive,” said Bradley Holcomb, chair of ISM’s Manufacturing Business Survey Committee, “while some indicate concern over global geopolitical situations.”

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Wood Products contracted in July thanks to shrinking new, backlogged and export orders. Paper Products expanded on the back of widespread support among the sub-indices.

The pace of growth in the non-manufacturing sector -- which accounts for 80 percent of the economy and 90 percent of employment -- jumped to a new, all-time record. The NMI registered 58.7 percent, 2.7 percentage points higher than June’s 56.0 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 more quickly in July, along with employment and imports.

“Respondents’ comments indicate that stabilization and/or improving market conditions have positively affected the majority of the respective industries and businesses,” said Anthony Nieves, chair of ISM’s Non-Manufacturing Business Survey Committee. 

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Real Estate and Construction expanded in July, while Ag & Forestry was unchanged.

Commodities up in price included construction labor, diesel, paper, paper products, and lumber. Natural gas was down in price; some respondents indicated paying more for gasoline, while others paid less. 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.

July 2014 Currency Exchange Rates

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In July the monthly average value of the U.S. dollar depreciated against two of the three major currencies we track: 0.8 percent against Canada’s loonie and 0.3 percent against the yen; the dollar appreciated by 0.5 percent relative to the euro. On a trade-weighted index basis, the dollar weakened by 0.2 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.

June 2014 U.S. Construction Spending

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Overall construction spending in the United States fell by 1.8 percent during June (the largest drop since January 2011), to a seasonally adjusted and annualized rate (SAAR) of $950.2 billion. Interestingly, the SAARs of the categories we track were negative “across the board” despite small not-seasonally adjusted gains in all but the private non-residential category.

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Click here for a discussion of June’s new residential permits, starts and completions. Click here for a discussion of new and existing home sales, inventories 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.