May 2011 Macro Pulse -- “Transitory” or “Transition”?

“Transitory” seems to be the Federal Reserve’s newfound adjective for describing a spate of recent negative economic data. The Federal Open Market Committee’s March 15 meeting minutes stated the Committee anticipates that “the effects on inflation of the recent run-up in commodity prices [will] prove transitory.” Fed Vice Chair Janet Yellen, in an April 11 speech to the Economic Club of New York, invoked the term six times. Examples included: “recent increases in commodity prices are likely to have only transitory effects on headline inflation… the overall inflationary consequences of these pass-through effects to be modest and transitory… my expectation regarding the transitory effects of commodity price shocks on consumer inflation… fairly modest and transitory effects of an oil price shock….” Finally, in his April 27 press conference, Fed Chair Bernanke said that -- other than construction, “most of the slowdown in the first quarter [was] viewed by the Committee as being transitory.”

Click here to read the entire May 2011 Macro Pulse recap. Are the developments mentioned there “transitory” or indicative of an economy in “transition”?

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. 

March 2011 Personal Income and Outlays, Retail Sales and Consumer Debt

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Bureau of Economic Analysis data showed that personal income increased $67.0 billion (0.5 percent), and disposable personal income (DPI) increased $64.4 billion (0.6 percent) in March. Personal consumption expenditures (PCE) increased $60.7 billion (0.6 percent), much of the rise went to higher priced food and fuel. Real DPI (DPI adjusted to remove price changes) increased 0.1 percent while real PCE increased 0.2 percent.
 

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Retail sales rose by 0.4 percent during March, the ninth straight month of increases. All categories advanced expect for motor vehicles sales, which declined by 1.5 percent.
 

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Total consumer debt outstanding increased for a sixth month in March, at seasonally adjusted and annualized rate of 3.0 percent. All of the increase was due to seasonal adjustments, as both the revolving and non-revolving categories shrank in not-seasonally adjusted terms. As we have seen before, the federal government was the debt holder with the largest increase in non-revolving debt (+$6.2 billion, not seasonally adjusted), which implies more individuals took out student loans in March. Financial institutions saw a small expansion in revolving credit.

April 2011 Employment Report

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Headline numbers from the April employment report were encouraging. That report showed the U.S. economy added 244,000 nonfarm jobs; even the 0.2 percentage point jump in the unemployment rate (to 9.0 percent) was heralded as good news because more people apparently looked for work in April. That job gain brought the change in nonfarm employment back nearly to 5 percent below the December 2007 peak.
 

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Those upbeat headlines were partially offset by somewhat less encouraging details. For example, the number of persons employed full time fell by 291,000 in April, while the number of persons employed part time for economic reasons rose by 167,000. This is not the outcome one would expect from an improving economy.

Nearly 6.5 million people were not counted as being in the labor force but would like a job now -- a jump of 232,000. Also, the total number of persons not considered part of the labor force rose to a new record above 86.2 million.

Other discouraging aspects of the report included a civilian labor force participation rate that remained unchanged at 64.2 percent (a 27-year low) while the annual percentage increase in average hourly earnings of production and non-supervisory employees hovered barely above 2 percent -- the slowest pace of growth since 2Q2004.

Although job gains were broader-based in April than in March, we can’t help but notice that 17 percent of the new private-sector jobs occurred in “Leisure & Hospitality.” In light of McDonald’s hiring of 62,000 workers in April, we suspect that many of those service jobs were part-time and low-paying positions.

March 2011 Manufacturers’ Shipments, Inventories and New Orders

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Shipments, inventories and new orders all posted gains at both the total manufacturing and individual industry levels during March according to the U.S. Census Bureau.
 

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Shipments, up seven consecutive months, increased $12.0 billion (2.7 percent) to $461.4 billion. Durable goods shipments increased $4.4 billion (2.1 percent) to $208.1 billion, led by transportation equipment. Shipments of nondurable goods increased $7.6 billion (3.1 percent) to $253.4 billion, thanks mainly to petroleum and coal products. Wood and Paper both rose, by 3.2 and 0.8 percent, respectively.
 

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Data from the Association of American Railroads (AAR) and the Ceridian-UCLA Pulse of Commerce Index (PCI) help round out the picture on goods shipments. AAR reported a whopping 31.5 percent jump in not-seasonally adjusted rail shipments between February and March. Applying seasonal adjustments reduces that estimate to a more sedate (and realistic sounding) 2.0 percent. The PCI (which measures diesel consumption of highway trucking) also rose by a seasonally and workday adjusted 2.7 percent.
 

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Total inventories, up 14 of the last 15 months, increased $6.3 billion (1.1 percent) to $572.3 billion in March. The inventories-to-shipments ratio was 1.24, down from 1.26 in February. Durable goods inventories increased $4.5 billion (1.4 percent) to $334.3 billion, led again by transportation equipment. Inventories of nondurable goods increased $1.8 billion (0.8 percent) to $238.1 billion, mainly because of petroleum and coal products. Wood and Paper inventories also swelled, by 0.5 and 0.3 percent, respectively.
 

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New orders for manufactured goods rose for a fifth consecutive month in March, increasing $13.5 billion (3.0 percent) to $462.9 billion. Excluding transportation, new orders increased 2.6 percent. Durable goods orders increased $5.9 billion (2.9 percent) to $209.5 billion. Transportation equipment had the largest increase, $3.2 billion (6.2 percent) to $54.9 billion. Nondurable goods orders increased $7.6 billion (3.1 percent) to $253.4 billion.

March 2011 U.S. Construction

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Overall construction spending in the United States increased by 1.4 percent during March, to a seasonally adjusted and annualized rate (SAAR) of $768.9 billion. Private residential construction rose by the largest margin, gaining 2.6 percent; public construction was nearly flat, rising by only 0.1 percent.
 

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Residential construction improved somewhat, with total housing starts climbing by 7.2 percent -- to 549,000 units (SAAR) -- in March. Despite the jump, starts remained nearly 76 percent below the January 2006 peak of nearly 2.3 million.
 

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Most of the increase in starts occurred in the single-family component (30,000); multi-family starts rose by only 7,000 units.
 

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New-home sales also improved relative to February’s record-low pace, increasing by 11.1 percent to 300,000 (SAAR) in March. The median price of new homes sold bounced back slightly (by 2.9 percent) to $213,800.
 

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Because sales rose while completions fell, the inventory of new homes shrank in both months-of-inventory and absolute terms. Inventory stood at 183,000 units and 7.3 months (down from 8.2 months). Interestingly, that number of homes for sale was the lowest since August 1967.
 

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Existing home sales fared somewhat better than their new-home counterparts in March, rising by 180,000 units (SAAR), or 3.7 percent. New home sales ticked higher as a percentage of the total; the share of total sales comprised of new homes expanded to 5.1 percent (from 4.9 percent in February).
 

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With the median existing home price rising by $3,600 (2.2 percent), to $159,600 in March, housing affordability retreated noticeably but remained near the all-time high set in February.
 

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“There is very little, if any, good news about housing. Prices continue to weaken, trends in sales and construction are disappointing.” said David M. Blitzer, chair of the Index Committee at S&P Indices, when presenting the most recent S&P/Case-Shiller home price indices. “Ten of the 11 metropolitan service areas (MSAs) that recorded index lows in January fell further in February. The one exception, Detroit, is 30 percent below its 2000 price level. The 20-City Composite is within a hair’s breadth of a double dip. Fourteen MSAs and both Composites have continued to decline month-over-month for more than six consecutive months as of February.”
 

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April 2011 ISM Reports

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The pace of growth in manufacturing slowed again in April, with the Institute for Supply Management’s (ISM) PMI falling to 60.4, a drop of 0.8 percentage point. "The recent trend of rapid growth in the manufacturing sector continued in April as the PMI registered above 60 percent for the fourth consecutive month,” said Norbert Ore, chair of ISM’s Manufacturing Business Survey Committee. "The New Orders and Production Indexes continue to drive the PMI, as they have both exceeded 60 percent for five consecutive months. Manufacturing employment appears to have developed significant momentum, as the Employment Index readings for the first four months of 2011 are the highest readings in the last 38 years. Inventory growth also took place in April after two months of destocking; however, the inventory restocking would appear to be necessitated by the strong performance in new orders. While the manufacturing sector is definitely performing above most expectations so far in 2011, manufacturers are experiencing significant cost pressures from commodities and other inputs."

For a change, both Wood and Paper Products reported growth in April. Most noteworthy was Wood Products’ increases in orders (both new and backlogged), production and employment. Paper Products’ improvement was even broader, encompassing new export orders and the need to replenish inventories in addition to production and employment.
 

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The non-manufacturing sector grew at a much slower pace in April, reflected by a 4.5 percentage point (to 52.8 percent) drop in the non-manufacturing index (now known simply as the “NMI”). In fact, the service sector is now within 2.8 percentage points of contracting. All three service industries we track expanded, however.

The rate of input price changes diverged between the manufacturing and service sectors once again. The index of prices paid by manufacturers rose by 0.5 percentage point (i.e., prices rose at a faster pace in April), and now stands at its highest level since July 2008. At the same time, however, non-manufacturers saw a 2.0 percentage point decline (i.e., prices rose more slowly) in their index. The lists of commodities up in price were quite lengthy, and included fuel of all kinds and paper. No commodity was down in price, neither was any relevant commodity described as in short supply.

April 2011 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate crude oil jumped again in April, rising by $7.10 (6.9 percent) to $110.04 per barrel -- the highest level since April 2008. That rise occurred in part because of the effects of a slightly weaker dollar, but despite a drop in consumption of 252,000 barrels per day (BPD) -- to 18.9 million BPD -- during February along with a continued rise in crude stocks during April.
 

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ASPO-USA attributes the rising oil price to “the falling dollar, rapidly increasing gasoline prices, continued unrest in the Middle East, power shortages in China, and a very tight global supply/demand balance.” In their opinion, manipulation by speculators is minimal.

The announcement by the Saudis that they have cut oil production to 8.2 million BPD means OPEC production is settling back to the lowest level in recent years.