March 2010 International Trade: Higher Volumes but Flat Prices

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World trade volume went up by 3.5 percent in March, following an increase of 1.7 percent in February, according to the Netherlands Bureau for Economic Policy Analysis (known by its Dutch acronym CPB). Trade volumes increased worldwide, with the notable exception of Japanese imports. Both exports and imports of the euro area grew “remarkably fast.” In March, world trade was 4 percent below the peak level reached in April 2008 and 21 percent above the trough reached in May 2009. Imports into emerging Asia were already 13 percent higher than their April 2008 peak.

CPB also estimates that average world prices rose slightly (0.4 percent) between February and March, breaking a two-month string of declines. Prices remain 15.2 percent below the July 2008 peak and 4.8 percent above the January 2009 trough.

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Narrowing the focus to the United States, total March exports of $147.9 billion and imports of $188.3 billion resulted in a goods and services deficit of $40.4 billion, the largest deficit since December 2008. March exports were $4.6 billion more than February exports of $143.3 billion, while imports were $5.6 billion more than February imports of $182.7 billion.

The February-to-March rise in goods exports reflected increases in industrial supplies and materials ($2.1 billion); other goods ($0.9 billion); consumer goods ($0.7 billion); capital goods ($0.5 billion); and foods, feeds, and beverages ($0.1 billion). Automotive vehicles, parts, and engines were virtually unchanged.

Imports of goods increased in industrial supplies and materials ($3.6 billion); automotive vehicles, parts, and engines ($1.2 billion); consumer goods ($0.5 billion); foods, feeds, and beverages ($0.4 billion); and capital goods ($0.3 billion). A decrease occurred in other goods ($0.1 billion).

The U.S. trade report was characterized as "very strong" by David Greenlaw and Ted Wieseman, economists for Morgan Stanley; they noted that the upside came mostly from higher volumes of trade, rather than from higher prices. John Ryding and Conrad DeQuadros, economists at RDQ Economics, agreed with that assessment: "This report speaks to the recovery in the both the United States and overseas as both exports and imports continue to advance at a fairly robust pace.”

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U.S. pulp, paper and paperboard trade followed the larger trade trend, in that both imports and exports rose; in this case, however, the change in exports outstripped that of imports by a wide margin. Interestingly, exports are well ahead of year-earlier levels but imports are barely even.

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Lumber imports and exports both expanded in March, but the change in imports was more than six times larger than that of exports. The lumber trade has picked up modestly relative to the same period in 2009.

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Because the greenback weakened in April against a broad range of currencies, we expect the next report to show the U.S. trade deficit widened once again in April. Concerns over Europe’s sovereign debt problems strengthened the dollar in May, however, and so we anticipate the May deficit will shrink somewhat.

1Q2010 GDP: Revisions Going the Wrong Way

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The U.S. economy grew at a 3.0 percent pace in 1Q2010 - slower than the 3.2 percent previously reported – primarily because of increases in consumer spending and investment in business software that were smaller than originally estimated.

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Growth in real 1Q2010 GDP reflected positive contributions from personal consumption expenditures (PCE), private inventory investment (a component of private domestic investment, or “PDI”), exports, and nonresidential fixed investment (another PDI component) that were partly offset by negative contributions from state and local government spending (government consumption expenditures, or "GCE") and residential fixed investment (another PDI component). Imports, which are a subtraction in the calculation of GDP, increased.

The downward revisions in real GDP reflected decelerations in private inventory investment and in exports, a downturn in residential fixed investment, a larger decrease in state and local government spending, and a deceleration in nonresidential fixed investment that were partly offset by an acceleration in PCE and a deceleration in imports.

April 2010 Consumer and Producer Price Indices: At a Tipping Point?

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U.S. consumer prices fell 0.1 percent on a seasonally adjusted (SA) basis in April as energy, housing, auto and apparel prices declined. It was the first drop in the consumer price index (CPI) since March 2009. The CPI is up 2.2 percent on a year-over-year basis, however. Because the “core” CPI (excluding food and energy prices) was unchanged in April, the annual increase in core inflation shrank to 0.9 percent, the lowest rate increase since January 1966.

Meanwhile, the main producer price index (PPI) fell 0.1 percent (SA). The more closely followed core rate – which, like the CPI, excludes volatile energy and food prices – rose 0.2 percent. Over the past 12 months, wholesale prices have risen 5.5 percent. But the core rate has risen only 1.0 percent in the past year.

The gap between the PPI and CPI lines indicates that companies’ ability to pass higher costs on to consumers is limited. We expect this situation to continue while capactity utilization rates remain low. Although capacity utilization improved again in April, it stands roughly midway between the previous peak and trough.

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The recent run-up in the finished-goods PPI has been driven mainly by rapid increases in the cost of commodities (“crude materials” in the graph above) such as oil and copper. Many of those same commodity prices have fallen sharply over the past month, however, in the wake of the Greece debt crisis. April’s year-over-year rise in crude materials prices was 28.8 percent, down from the recent peak of 33.4 percent in March. By contrast, the intermediate goods PPI continued higher (to 8.8 percent); one analyst opined that “while this isn’t an immediate recipe for higher consumer prices, it is definitely indicative that pressure is building in the pipeline.”

It is true pressure is building; producers face higher costs, but are unable to recover them in higher prices. Profits are being squeezed (or negative) and thus more capacity will be shut down. Reduced capacity will tighten capacity utilization, laying the groundwork for the potential of costs being passed through to the consumer as higher prices down the road.

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Although the headline PPI has "tipped over," forest products-related PPIs (except pulpwood) have not yet followed suit. Granted, many of them rose at slower rates in April when compared to March, but their trajectories were still on the incline.

The scaling in the six-chart figure above gives the impression that year-over-year percentage changes in the PPIs of virtually all processing stages or commodity groups are “rocketing to the moon.” That is actually the exception rather than the rule, as shown by the figure at left (click on graph for larger image) and table below. While prices of softwood logs, bolts and timber are presently on a year-over-year “tear” at 35.9 percent (although we expect softwood logs to follow pulpwood’s lead and lose momentum as expectations of a robust rebound in construction demand continue to fade), prices faced by the pulp, paper and allied products sector are a comparatively tame 3.5 percent. Lumber futures have plummeted in recent weeks; as of today's (5/19/2010) close the July contract has lost over $100/mbf since mid-April (a 30 percent drop) and we anticipate that loss of optimism will be reflected in the softwood log PPI measure during coming months.

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April 2010 U.S. Treasury Statement: More Red Ink

The U.S. Treasury released its latest Monthly Treasury Statement on May 12 and revealed that for the second year in a row – and for only the third time since 1983 – outlays from the Treasury exceeded revenues during the month of April (click on graph for larger image).

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Surprisingly, the cumulative budget deficit is $2 billion smaller – so far in fiscal year 2010 – than it was last year. We expect the shortfall to widen and overtake 2009’s levels as the year progresses, however.

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The long-term picture is equally gloomy. The International Monetary Fund expects U.S. debt levels to exceed 100 percent of GDP by 2015. Moreover, Moody’s Investor Services forecasts that a debt crisis will hit the United States sometime between 2013 and 2018 – whenever 18 to 20 percent of federal revenue is consumed by debt service (i.e., interest) payments. Given the global fallout that has transpired in the wake of Greece's sovereign debt crisis (with $357 billion 2Q2010 GDP, or only 0.58 percent of the world's economy), the potential consequences of a similar turn of events in the United States is nearly incomprehensible.

April 2010 Industrial Production Climbs More Than Forecast

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According to the Federal Reserve’s G.17 report, “Industrial production increased 0.8 percent in April after having risen 0.2 percent in March… Manufacturing output climbed 1.0 percent in April for a second consecutive month and was 6.0 percent above its year-earlier level. The increases in manufacturing continued to be broadly based across industries…At 102.3 percent of its 2002 average, total industrial output in April was 5.2 percent above its year-earlier level.” The April gain was the biggest since a 1.2 percent jump in January.

Economists forecast industrial production would increase 0.7 percent in April, according to the median of 81 projections in a Bloomberg survey. "The manufacturing sector continues to sort of lead the way in the recovery," said Julia Coronado, a senior economist at BNP Paribas in New York. Factories are "benefiting from the upswing in the inventory cycle, recovering global trade and the upswing in consumer spending," she said.

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The all-industries capacity utilization rate advanced 0.9 percent (to 73.7 percent), the highest since November 2008, and 6.5 percent above the rate from a year earlier. Wood Products and Paper both posted solid gains.

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Capacity shrank in April, not only at the all-industries level, but also in Wood and Paper.

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Because the industrial production recovery has been engineered to some extent by fiscal and monetary stimulus over the past year, there is still debate about its sustainability. In particular, some analysts wonder if current growth is merely borrowing expansion from the future. If so, 2H2010 or 1H2011 may suffer as payback kicks in. As one pundit put it, "The next several months may prove to be a crucial period for deciding what lies ahead. In essence, the snapback period of growth after the recession will be stress tested for durability through the coming weeks and months. One burden that awaits is the Herculean task of digesting the piles of debt mounting in the United States and around the world while containing inflation."

Macro Pulse May 2010 -- Extending the Trend

Executive Summary

Our call last month for a 3.1 percent rise in 1Q2010 real gross domestic product (GDP) hit close to the Bureau of Economic Analysis’ peg of 3.2 percent. Although considerably lower than 4Q2009’s 5.6 percent, the 1Q2010 growth would have been slower yet had consumer spending not jumped at the fastest rate in three years.

On its surface, the April employment report looked quite encouraging. Non-farm payroll employment rose by an estimated 290,000 jobs, although the unemployment rate edged up to 9.9 percent because of the number of people returning to the labor force. Because of slow hiring, the rise in consumer spending outstripped the increase in incomes again in March. Although incomes still exceed outlays, the two metrics are converging.

The manufacturing sector expanded in April for the ninth consecutive month. The performance of individual industries at least somewhat related to the forest products sector improved “across the board.” Most housing metrics showed gains in March; in the activity category, only single-family starts and total completions declined.

The Netherlands Bureau for Economic Policy Analysis estimates the volume of world trade expanded at least through February. Closer to home, U.S. exports and imports both rose in February; the trade deficit widened, though, because imports rose more quickly than exports. The monthly average price of West Texas Intermediate crude oil rose for a second consecutive month in April, to $84.48 per barrel – a gain of $3.24 (4.0 percent). The wider trade deficit and more expensive oil stemmed from the U.S. dollar’s depreciation against a basket of 26 currencies.

Click here to read the entire May 2010 Macro Pulse.

April 2010 Employment Report: Ghosts, Temps and Census Workers – Oh My!

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Although the Bureau of Labor Statistics (BLS) estimates non-farm payroll employment rose by 290,000 in April, the unemployment rate edged up to 9.9 percent because of the number of people returning to the labor force. Job gains occurred in manufacturing, professional and business services, health care, and leisure and hospitality. Federal government employment also rose, reflecting continued hiring of temporary workers for Census 2010.

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Total non-farm employment stood at 130.2 million in April, down 7.8 million (5.6 percent) from the December peak of 138.0 million.

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The estimate of 290,000 added jobs is just that – an estimate. It is important to note that 188,000 (65 percent) of those 290,000 jobs were the result of Current Employment Statistics (CES) models the BLS uses to account for business closings and openings that occurred recently enough that they were not captured in the employment survey. Because these jobs are derived from statistical models, some analysts refer to them as “ghost” jobs. Those models do no always perform well, so their results should be taken with a grain of salt.

Another aspect of the report that many in the mainstream media often overlook is the number of temporary jobs. As mentioned above, the Census Bureau hired 66,000 temporary workers to help with the 2010 census. What is less widely reported, however, is that another 26,000 workers were hired by temporary help services. I.e., 92,000 (almost a third) of the 290,000 jobs were temporary in nature.

Subtracting the 188,000 “ghost” jobs, the 66,000 Census workers, and the 26,000 temporary private-sector hires from the 290,000 leaves us able to assert with some confidence that at least 10,000 permanent, full time positions were created in April.

Some other findings from the employment report include:

• 15.3 million remained unemployed in April; also the unemployment rate edged up to 9.9 percent after remaining stable at 9.7 percent during the previous three months. The unemployment rate edged up because more people returned to the workforce.
  
• The number of long-term unemployed (those jobless for 27 weeks and over) continued to trend up over the month, reaching 6.7 million. In April, 45.9 percent of unemployed persons had been jobless for 27 weeks or more.
  
• The number of persons employed part time for economic reasons (either because their hours had been cut back or because they were unable to find a full-time job) was about unchanged at 9.2 million.
  
• About 2.4 million persons were marginally attached to the labor force in April (compared with 2.1 million a year earlier). These individuals were not in the labor force, wanted and were available for work, and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the four weeks preceding the survey. Among the marginally attached, there were 1.2 million discouraged workers (up by 457,000 from a year earlier). Discouraged workers are persons not currently looking for work because they believe no jobs are available for them. The remaining 1.2 million persons marginally attached to the labor force had not searched for work in the four weeks preceding the survey for reasons such as school attendance or family responsibilities.
  
• An alternative measure of labor underutilization (called the “U-6”) – which tallies the “officially” unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force – rose to 17.1 percent in April (from 16.9 percent in March). The U-6 measure used to be the official unemployment rate until during the Clinton administration.
  
• The average workweek for all employees on private non-farm payrolls increased by 0.1 hour to 34.1 hours. Also, average hourly earnings of those employees increased by one cent to $22.47 in April.
  

In summary, although it is impossible to know how many people actually succeeded in finding permanent employment in April, we can be at least reasonably confident that the employment situation has not worsened materially since January. Nonetheless, there remains considerable slack in labor demand.