October 2014 Macro Pulse -- Behind the Headlines

The macroeconomic headlines published during the past month were generally upbeat. The most obvious example was the revision of 2Q2014 real GDP growth to 4.6 percent -- the best quarter-to-quarter improvement since 2Q2000, and the second best since the 2Q1982. Other positives included the addition of 248,000 non-farm jobs in September (with the prior two months revised up by 69,000 jobs), and the unemployment rate’s 0.2 percentage point drop to 5.9 percent. Of course, recent data releases were not universally positive, however. For example, …

Click here to read the rest of the October 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.

August 2014 International Trade (Softwood Lumber)

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Softwood lumber exports decreased by 3 MMBF (2.0 percent) in August while imports fell by 80 MMBF (7.2 percent). Exports were 12 MMBF (7.7 percent) below year-earlier levels; imports were 140 MMBF (15.7 percent) higher. 

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The rest of North America (i.e., Canada and Mexico) was the primary destination for U.S. softwood lumber exports in August, although Asia (especially China and Japan) was a close second; Canada was also the largest single-country destination. Year to date (YTD), exports to China were up over 21 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 5.8 percent compared to the same period in 2013, while imports were up 9.2 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 August. At the same time, Great Lakes customs districts (especially Duluth, MN) handled over 69 percent of the softwood lumber imports coming into the United States. 

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Southern yellow pine comprised 21.5 percent of all softwood lumber exports in August, followed by Douglas-fir 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.

August 2014 International Trade (General)

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Total August exports of $198.5 billion and imports of $238.6 billion resulted in a goods and services deficit of $40.1 billion, down from $40.3 billion in July. August exports were $0.4 billion more than July exports of $198.0 billion. August imports were $0.2 billion more than July imports of $238.3 billion.

In August, the goods deficit increased $0.1 billion from July to $59.9 billion, and the services surplus increased $0.3 billion from July to $19.8 billion. Exports of goods increased $0.1 billion to $138.8 billion, and imports of goods increased $0.1 billion to $198.7 billion. Exports of services increased $0.4 billion to $59.6 billion, and imports of services increased $0.1 billion to $39.9 billion.

The goods and services deficit increased $0.6 billion from August 2013 to August 2014. Exports were up $7.9 billion, or 4.1 percent, and imports were up $8.4 billion, or 3.7 percent.

As MarketWatch explained, however, the smaller trade deficit is thanks to oil exports:

The U.S. exported a record $14.1 billion in petroleum products and imported the least amount, $27.2 billion, since late 2010.

As a result, the nation’s petroleum deficit dropped in August to the lowest level in 10 years.

Oil production is surging in the U.S. because technologies such as fracking are allowing companies to tap reserves previously inaccessible.

Yet excluding petroleum, the U.S. trade deficit rose to $45.1 billion to mark the highest level in three months, mainly because of higher imports. Cheaper foreign currencies and a stronger dollar are enabling Americans to more easily afford foreign goods.

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On a global scale, data compiled by the Netherlands Bureau for Economic Policy Analysis showed that world trade volume increased by 1.4 percent in July (from the prior month) 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.

September 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 stumbled in September. The PMI fell back to 56.6 percent, a decrease of 2.4 percentage points from August’s 59.0 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. All of the sub-indices weakened except for Production and Input Prices.

Nonetheless, Bradley Holcomb, chair of ISM’s Manufacturing Business Survey Committee said that “comments from the panel reflect a generally positive business outlook, while noting some labor shortages and continuing concern over geopolitical unrest.”

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There was fairly wide-spread support among the sub-indices for the expansion in both Wood and Paper Products during September. Although one Paper Products respondent observed, “Outlook is very good; demand seems to be growing,” declining employment and new export orders present some potential future downside risks.

The pace of growth in the non-manufacturing sector -- which accounts for 80 percent of the economy and 90 percent of employment -- also retreated in September. The NMI registered 58.6 percent, 1.0 percentage point lower than August’s 59.6 percent; the drop appears to have been primarily concentrated in the New Orders and Orders Backlog sub-indices. “Respondents’ comments indicate that business seems to be leveling off and there is a slight slowing in the momentum of the past few months of strong growth,” said Anthony Nieves, chair of ISM’s Non-Manufacturing Business Survey Committee. Even so, “they continue to remain optimistic about business conditions and the overall direction of the economy.”

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Two of the three service industries we track reported expansion in September, although only Construction had meaningful support among the sub-indices. “In the building industry there continues to be a lot of remodeling and smaller additions with replacement facilities and new buildings lagging,” wrote one Construction respondent. “Many companies would like to build new, but are still concerned about making the large investment at this time.”

Commodities up in price included lumber and paper products. Some respondents indicated paying more for fuel, others less. 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.

August 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 decreased $5.0 billion or 1.0 percent to $503.1 billion in August. Shipments of durable goods decreased $4.0 billion or 1.6 percent to $245.9 billion, led by transportation equipment. Meanwhile, nondurable goods shipments decreased $1.0 billion or 0.4 percent to $257.2 billion, led by petroleum and coal products. Wood and Paper shipments rose by 1.0 and 0.2 percent, respectively. 

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Inventories increased $0.8 billion or 0.1 percent to $653.9 billion (the highest level since the series was first published on a NAICS basis). The inventories-to-shipments ratio was 1.30, up from 1.29 in July.

Inventories of durable goods increased $1.7 billion or 0.4 percent to $403.1 billion, led by transportation equipment. Nondurable goods inventories decreased $0.9 billion or 0.3 percent to $250.8 billion, led by petroleum and coal products. Inventories of Wood expanded by 0.1 percent, while Paper was unchanged. 

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New orders decreased $56.1 billion or 10.1 percent to $502.0 billion, more than reversing July’s biggest month-over-month rise on record. Excluding transportation, new orders decreased 0.1 percent -- the third drop in the last four months. Durable goods orders decreased $55.1 billion or 18.4 percent to $244.8 billion, led by transportation equipment. New orders for nondurable goods decreased $1.0 billion or 0.4 percent to $257.2 billion.

Prior to July, as can be seen in the graph above, real (inflation-adjusted) new orders had been essentially flat since early 2012, recouping roughly 75 percent of the losses incurred since the beginning of the Great Recession. With July’s transportation-led spike now in the rearview mirror, new orders have dropped back to around 73 percent or their December 2007 high. 

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Unfilled durable-goods orders increased $7.0 billion or 0.6 percent to $1,164.5 billion, led by transportation equipment. The unfilled orders-to-shipments ratio was 6.71, up from 6.62 in July. Real unfilled orders, a good litmus test for sector growth, show a much different picture; in real terms, unfilled orders in June were back to just 79 percent of their December 2008 peak. Real unfilled orders jumped to 102 percent of the prior peak in July, thanks to the largest-ever batch of aircraft orders, and are likely to keep this metric elevated for several years.

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.

September 2014 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil extended its retreat for a third month, falling $3.23 to $93.31 per barrel. That price drop coincided with a notably stronger U.S. dollar and the lagged impacts of a 331,000 barrel-per-day (BPD) increase in the amount of oil supplied in July (to 19.2 million BPD), but occurred despite a continued downward trend in crude oil stocks. The monthly average price spread between Brent crude (the predominant grade used in Europe) and WTI narrowed by $1.17 in September, to $3.90 per barrel. 

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“In general the drop in oil prices is being driven by what is perceived to be too much oil chasing too few buyers,” wrote ASPO-USA’s Tom Whipple. “Economies are sagging in the EU and China. U.S. demand is up a bit though not that strong. Credit Suisse says that production cuts are necessary to shore up oil prices. The outlook seems to be that still lower prices are ahead (Iran expects $90/barrel oil by March). If this should happen several crude exporting countries will have trouble keeping their budgets in balance and some U.S. shale oil producers will have trouble making a profit.”

News that Saudi Arabia is cutting its selling price seems to support Whipple’s prediction. “We consider that absent a supply disruption in Iraq, crude prices are likely to remain at subdued levels over the medium term as supply growth exceeds demand growth,” agreed National Australia Bank economist Phin Ziebell. However, “given that crude futures are already at their multiyear lows, we see limited downside risk to prices at this juncture,” said Barnabas Gan, an analyst at Singapore’s OCBC Bank, “especially as geopolitical risk-premiums may have already been substantially narrowed.” 

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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 U.S. Construction Spending

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Overall construction spending in the United States fell by 0.8 percent during August (well below expectations of a 0.5 percent increase), to a seasonally adjusted and annualized rate (SAAR) of $961.0 billion. The private non-residential category led the decrease on both absolute (-$5 billion) and percentage (-1.4 percent) bases. Also, July’s increase was lowered to 1.2 percent (from the initial +1.8 percent estimate). 

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Click here for a discussion of August’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.