January 2011 Currency Exchange Rates

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During January the U.S. dollar lost ground “across the board” against the other currencies we track. The largest percentage drop occurred against Canada’s loonie, which broke through parity with the greenback on a monthly average basis for the first time since May 2008. On a trade-weighted index basis, the dollar depreciated 1.2 percent against a basket of 26 currencies.
 

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Canada: The loonie’s value got a helping hand from news that the rate of growth in real GDP quickened in November (+0.4 percent, up from 0.2 percent in October). But we suspect the biggest boost came as the result of comments from Finance Minister Jim Flaherty that the strong loonie reflects confidence in the country’s economy. “Business people I’ve met here certainly share the view…that the Canadian dollar is not likely to go back to the days of being relatively cheap vis-à-vis the U.S. dollar,” Flaherty said. “We’re done with the Canadian ‘peso.’”

Europe: With China (and now Japan) purchasing small -- but symbolically important -- amounts of European government bonds, currency traders were able to temporarily ignore Europe’s ongoing sovereign debt problems while bidding up the euro. Instead, they concentrated on a mid-January report stating that Germany’s government had raised its 2011 growth forecast to 2.3 percent. "Germany's economy achieved the comeback of the year in 2010," Economy Minister Rainer Bruederle said. "2011 will be a good year. The upswing has two stable legs: export and domestic demand."

Japan: Even the yen caught a bit of wind in its sails during January, despite Standard & Poor’s cutting the country’s credit rating for the first time since 2002. About the only positive news we encountered during the past month that might explain the yen’s appreciation involved better-than-expected growth in exports. December exports rose 13 percent from a year earlier, while imports rose 10.6 percent. As a result, Japan's trade surplus jumped 34.1 percent to 727.7 billion yen ($8.86 billion). Exports to China, Japan's largest trading partner, rose 20.1 percent.

4Q2010 Gross Domestic Product: First Estimate

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The Bureau of Economic Analysis (BEA) reported that the rate of growth in real U.S. gross domestic product (GDP) accelerated slightly in 4Q2010 relative to 3Q. The U.S. economy expanded at a 3.2 percent annual rate, up from 2.6 percent in the previous quarter. Personal consumption expenditures (PCE) and net exports (NetX) contributed to growth while private domestic investment (PDI) subtracted from it. Government consumption expenditures were essentially a “wash.”
 

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The report’s details raise some questions. First, how could PCE expand if real gross domestic purchases -- purchases by U.S. residents of goods and services wherever produced -- decreased by 0.3 percent and net exports rose?

Second, a supposed drop-off in imports contributed to GDP growth for the first time since 2Q2009. But did imports really fall? According to Census Bureau estimates, imports averaged $198.1 billion per month during 3Q2010 and $197.4 billion per month during the first two months of 4Q2010 for which data are available. Note that those are nominal, not inflation-adjusted, amounts. It would hardly seem that a $700 million-per-month decline in imports between 3Q and 4Q would boost GDP by the amount claimed. So, unless 4Q import prices rose substantially to amplify the nominal drop in imports, their contribution to GDP growth would certainly be suspect. As it turns out, though, import prices did in fact rise during 4Q, particularly for goods imports, and by a wide margin -- +21.8 percent on an annualized basis, from 3Q’s -9.2 percent. That 31 percentage point swing in goods import prices was enough to reduce the 4Q impact of imports to the point that they boosted GDP growth. Such are the vagaries of changes in percentages when computing statistics.

So, our takeaway of the GDP report is that economic activity increased during 4Q2010 on a combination of suspect consumer-fueled spending and statistical peculiarities, not because of a healthier and sustainable expansion to the means of production.

November 2010 International Trade

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According to data compiled by the Netherlands Bureau for Economic Policy Analysis, world trade volume jumped by 2.3 percent in November from the previous month, following an upwardly revised increase of 1.0 percent (originally 0.5 percent) in October. The upsurge was due primarily to an acceleration of trade flows into and out of emerging economies. Emerging economies’ import volume went up by a “staggering” 5.1 percent. With the exception of Africa and the Middle East, all emerging regions contributed to the surge, import growth being highest in emerging Asia. The same pattern was mirrored on the export side: Emerging countries’ export volume grew 3.2 percent overall. Advanced economies’ healthy import growth of 1.0 percent was led by the Euro Area and Japan. In Japan a series of four monthly declines came to an end. U.S. imports continued to decline, while exports contracted in both the United States and Japan.

Although the trade volume increase was quite dramatic in November, price changes were less so. Prices ticked up by only 0.2 percent, but are almost 7.8 percent higher than in June 2010.
 

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The U.S. goods and services deficit shrank to $38.3 billion in November, virtually unchanged from October’s $38.4 billion. Total November exports were $159.6 billion and imports were $198.0 billion. Import growth has been essentially flat since last June, while exports have trended higher by about $1.4 billion per month -- far slower than the rate needed to meet the White House goal of doubling January 2010’s exports by 2015. Doubling will not be achieved until early 2018 at the current rate of growth.
 

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U.S. paper exports did not contribute to the rise in overall exports; they shrank by 119,000 metric tons (-4.0 percent) while imports rose by 49,000 tons (12.3 percent). Both imports and exports remained above year-earlier levels.
 

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Softwood lumber exports rose by a meager 10 MMBF (8.8 percent) in November; imports fell by a greater margin in absolute terms (-14 MMBF, or 3.2 percent). As with paper, both lumber exports and imports remain above year-earlier levels.

December 2010 U.S. Treasury Statement and Debt Overview

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The United States’ public debt stood at $13.562 trillion as of the end of September 2010, more than double the level of a decade earlier. As can be seen from the charts above and below, almost 90 percent of that fiscal year-end 2010 debt was held by federal intra-governmental holding accounts (over half of which was comprised of the Federal Old-Age and Survivors Insurance Trust Fund), and foreign and domestic investors of various types. China, Japan and the United Kingdom were the three largest foreign holders of U.S. debt.
 

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Interestingly, nearly all (92 percent) of the debt added during the first nine months of 2010 was underwritten by foreign and private domestic investors. Since Europe’s sovereign debt problems heightened during that timeframe, we suspect safe-haven buying of U.S. Treasuries was an important explanation for why those investor classes behaved as they did.
 

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The debt picture has continued to worsen since September. The debt grew to $14.025 trillion by the end of December 2010, a change of nearly $0.5 trillion in just three months. Because the debt is growing, tax receipts since the beginning of FY2011 (i.e., October 1, 2010) obviously have not kept pace with budget outlays. Indeed, the red ink deepened again in December as outlays of $316.9 billion and receipts of $236.9 billion added another $80.0 billion to the federal budget deficit.
 

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Foreigners have been stepping into the funding gap. The amount of U.S. public debt held by foreigners is homing in on $4.5 trillion. China remained the largest foreign creditor in November ($896 billion) despite selling $11.2 billion of Treasury securities. Great Britain, on the other hand, purchased $33.3 billion in November -- a 7 percent increase from October.
 

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Central banks control nearly 65 percent of the foreign-held U.S. Treasuries, down from almost 75 percent a year earlier.
 

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In November the Federal Reserve overtook both China and Japan in terms of U.S. Treasury holdings ($901 billion). Furthermore, were the Fed to maintain its November rate of Treasury purchases for a year, it would nearly double its current holdings. As mentioned above, China was a net seller in November, while Japan’s pace of purchases was comparatively slow. Like the Fed, the U.K.’s pace of purchases picked up in November, and would nearly double its holdings if maintained for another year.

More recent data shows the Fed has ramped up purchases of U.S. Treasury debt since November, and held nearly $1.1 trillion as of mid-January.
 

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Even though foreign investors have been net buyers of Treasury debt, they could potentially be pulling funds out of other types of U.S. investment vehicles. Actually, that has not been the case since June 2010, as evidenced by the positive three-month-average net inflows shown by the Treasury International Capital (TIC) accounting system.
 

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What is apparent, however, is that short-term U.S. securities (e.g., T-bills) seem to be losing their international appeal, perhaps in part because of the paltry yields associated with those investments. Foreign investors were net sellers of short-term U.S. debt in September and November, hence why the three-month average went negative in November.
 

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Net inflows into long-term public debt nearly doubled (to $75.9 billion) in November, but the three-month average dropped anyway because of October’s weak inflows. Purchases of private securities have been relatively stable for the three months leading up to and including November -- averaging $18.5 billion.

December 2010 Consumer and Producer Price Indices

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The seasonally adjusted Consumer Price Index for All Urban Consumers (CPI-U) increased 0.5 percent in December on a seasonally adjusted basis. Over the last 12 months, the all items index increased 1.5 percent.

The energy index increased in December. The gasoline index rose sharply and accounted for about 80 percent of the all items seasonally adjusted increase. The household energy index, which declined in November, increased as well. The food index increased slightly in December, with the fruits and vegetables index rising notably.

The index for all items less food and energy also rose in December. An increase in the shelter index accounted for about 60 percent of the rise, and the indexes for airline fares, medical care and apparel rose as well. These increases more than offset declines in the indexes for communication, recreation, and household furnishings and operations.

The seasonally adjusted Producer Price Index for Finished Goods (PPI) rose 1.1 percent in December, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. This advance followed increases of 0.8 percent in November and 0.4 percent in October and marks the sixth straight rise in finished goods prices. At the earlier stages of processing, prices received by manufacturers of intermediate goods moved up 1.0 percent, and the crude goods index increased 4.0 percent. On an unadjusted basis, prices for finished goods advanced 4.0 percent in 2010 after climbing 4.3 percent in 2009.
 

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Details at different stages of processing include:

Finished goods -- About three-fourths of the December rise in the finished goods index can be traced to prices for energy goods, which increased 3.7 percent. Also contributing to the broad-based advance in the finished goods index, prices for consumer foods and for goods other than foods and energy moved up 0.8 percent and 0.2 percent, respectively.

Intermediate goods -- This index moved up 1.0 percent in December, its fifth consecutive monthly advance. Accounting for about two-thirds of the broad-based December increase, prices for intermediate energy goods rose 3.1 percent. The indexes for both intermediate materials less foods and energy and for intermediate foods and feeds also contributed to this advance, rising 0.4 percent and 0.6 percent, respectively. In 2010, prices for intermediate goods climbed 6.5 percent after increasing 2.9 percent in 2009.

Crude goods -- The crude-goods index increased 4.0 percent in December. For the three months ended in December, crude goods prices advanced 9.0 percent. Accounting for about 70 percent of the December monthly increase, the index for crude energy materials climbed 7.7 percent. Also contributing to this broad-based advance, prices for crude nonfood materials less energy and for crude foodstuffs and feedstuffs moved up 3.1 percent and 1.1 percent, respectively.
 

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In the case of forest products sector, the indices we track are either stable or moving higher. Except for pulpwood, prices are all higher than year-earlier levels although the rate of growth has slowed in several cases.
 

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December 2010 Industrial Production, Capacity Utilization and Capacity

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Industrial production increased 0.8 percent in December after having risen 0.3 percent in November. The rate of change for industrial production was revised down in November but revised up in September and October; the net effect of the revisions from July to November left the level of industrial production in November slightly higher than was previously reported. For the fourth quarter as a whole, industrial production increased at an annual rate of 2.4 percent, a slower pace than in the earlier quarters of the year. In the manufacturing sector, output moved up 0.4 percent in December with gains in both durables and nondurables. Excluding motor vehicles and parts, factory output increased 0.5 percent. The output of mines advanced 0.4 percent; the output of utilities surged 4.3 percent, as unusually cold weather boosted the demand for heating. At 94.9 percent of its 2007 average, total industrial production in December was 5.9 percent above its level of a year earlier. Industrial production among forest products manufacturers decreased by at least 0.5 percent in December.
 

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December’s all-industry capacity utilization rate rose to 76.0 percent, a rate 4.6 percentage points below its average from 1972 to 2009. Forest products manufacturing capacity utilization rose 0.1 percent for Wood Products, but fell 0.5 percent for Paper.
 

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Capacity at the all-industries level was essentially flat for a fourth month in December, but fell in both the Wood Products and Paper sectors.

January 2011 Macro Pulse -- Climbing Out of the Well

Because enough indicators have shown some improvement in the last few months, many analysts have concluded the U.S. economy has turned the corner and is on the mend. When these recent improvements are placed in context, however, perhaps a more apt analogy for the state of the economy would be that of someone who has fallen into a well, and -- with no one around to help -- must save himself by scaling the wet and slippery walls. Yes, perhaps the first few feet have been successfully negotiated, but one slip could send the economy hurtling back down the shaft. To be declaring victory while still effectively “at the bottom” seems to be rather premature and a denial of very credible obstacles and risks.

What obstacles and risks do we see? Click here to find out by reading the entire January 2011 Macro Pulse.

The Macro Pulse blog is a commentary about recent economic developments that affect the forest products industry. That commentary provides context for our 24-month forecast, which is contained in the monthly Economic Outlook newsletter available through Forest2Market. The monthly Macro Pulse newsletter summarizes the previous 30 days of commentary available on this website.