June 2010 Personal Income and Outlays, Retail Sales and Consumer Debt: Stuck in Neutral

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Disposable personal income (DPI) increased $5.1 billion (essentially unchanged on a percentage basis) in June, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) decreased $2.9 billion (also essentially unchanged). Although still in positive territory, year-over-year growth in both DPI and PCE has been trending lower since March.

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Given the fall-off in PCE, it is not surprising that retail sales also retreated in June. The decline was particularly noticeable in the motor vehicles category. Food service sales were again the only category reporting an increase in June.

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PCE is falling partly because the personal saving rate is rising; consumers saved 6.4 percent of after-tax income in June, the highest reading in nearly a year. The savings rate is now about three times the 2.1 percent average for all of 2007, before the recession began. In addition, they are paying down debt (or convincing lenders to write off what is uncollectible). Consumer debt declined by $9.1 billion in June (-4.5 percent SAAR), 80 percent of which was in the revolving credit category (e.g., credit cards).

As Joshua Shapiro, chief U.S. economist at MFR Inc., explained: “It is important to understand that recent consumption gains have been substantially fueled by higher government transfer payments (a source of income that due to its nature is 100 percent spent) and by impetus from a short-lived bounce in home sales spurred by the now defunct homebuyer tax credit. Neither of these is a sustainable source of spending increases, which ultimately must be financed by private sector job growth and consequent gains in wages and salaries.”

Ryan Sweet, a senior economist at Moody’s Economy.com. summed up our view of the near future very succinctly when saying, “Consumers are still hunkered down. The second half of this year we’re going to see slower spending.”

2Q2010 GDP: Speed Bump or Initial Phase of Double Dip?

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Real gross domestic product (GDP) -- the output of goods and services produced by labor and property located in the United States -- increased at a weaker-than-expected annual rate of 2.4 percent in 2Q2010, according to the "advance" estimate released by the Bureau of Economic Analysis. That rate of growth was considerably slower than the upwardly revised 3.7 percent of 1Q2010.

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The 2Q2010 rise in real GDP primarily reflected positive contributions from personal consumption expenditures (PCE); nonresidential fixed investment, private inventory investment and residential fixed investment (all components of private domestic investment or PDI); exports (part of net exports or NetX); and federal government spending (part of government consumption expenditures or GCE). Imports (the other part of NetX), which are a subtraction in the calculation of GDP, increased.

The 2Q2010 slowdown in real growth primarily reflected an acceleration in imports and a deceleration in private inventory investment that were partly offset by an upturn in residential fixed investment, an uptick in nonresidential fixed investment, an upturn in state and local government spending, and an increase in federal government spending.

“If this were an average recovery, the economy would be growing at a 6 percent rate at this point, which pretty much says it all about our current 2.4 percent number,” wrote John Mauldin, president of Millennium Wave Advisors. “Further, 2.5 years after the beginning of a recession, we [typically would already be] 8 percent higher than the prior high. [Instead,] as of today, we are not quite back to where we started, still down 1 percent. This is a very tepid recovery, indeed.”

One of the noticeable differences in the makeup of 2Q GDP growth is the contribution of residential fixed investment for only the second time since 1Q2006. Another is that GCE came “roaring back” in 2Q.

Neither of those components is likely to have much in the way of staying power, however. With foreclosures likely to top one million this year, ownership rates falling back to more traditional levels, and high unemployment levels leading to a proliferation of mortgage delinquencies, residential real estate probably will not contribute much to GDP in 3Q.

As for government spending, the bulk of the stimulus programs -- especially those that benefited state and local governments -- are going away in the latter half of the year. We expect a surge in spending leading up to November's elections, followed by a dramatic fall-off thereafter. Further, state and local governments are slated to cut back spending or raise taxes by almost 1 percent of GDP; also, as many as 500,000 government employees (and not just Census enumerators) may lose their jobs.

May 2010 International Trade: World Trade Volumes and Prices Trending Higher

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According to data compiled by the Netherlands Bureau for Economic Policy Analysis (known by its Dutch acronym CPB) world trade volume increased by 1.8 percent in May from the previous month, following an upwardly revised decrease of 1.1 percent in April. The rebound in trade volume enabled prices to jump nearly 3.5 percent in May. Although the volume of trade has nearly returned to its April 2008 peak, prices are lagging.

Import volumes went up in the advanced economies as well as emerging Asia and emerging Europe, whereas Latin America, Africa and the Middle East posted sizable declines. Import growth was extraordinarily high in Japan. Export volume increased in all major regions with the exception of emerging Europe. In May, world trade was 3 percent below the peak level reached in April 2008 and 23 percent above the trough reached in May 2009.

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Turning to the United States, the U.S. trade deficit unexpectedly widened by 4.8 percent in May to $42.3 billion. Imports of goods and services ($194.5 billion, up $5.5 billion) rose faster than exports ($152.3 billion, up $3.5 billion) in May. The deficit for the year now totals $197.8 billion, up from $143.8 billion in the same period last year.

The April-to-May increase in exports of goods reflected increases in capital goods; industrial supplies and materials; consumer goods; and automotive vehicles, parts, and engines. A decrease occurred in other goods. Foods, feeds, and beverages were virtually unchanged.

The April-to-May increase in imports of goods reflected increases in consumer goods; automotive vehicles, parts, and engines; capital goods; and foods, feeds, and beverages. A decrease occurred in industrial supplies and materials. Other goods were virtually unchanged.

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U.S. trade in wood pulp, paper and paperboard contributed to the widening trade gap; exports fell by 161,000 metric tons (5.5 percent) while imports rose a marginal eight metric tons (2.1 percent). Both imports and exports were essentially at their year-earlier levels in May; on a year-to-date basis, however, exports are nearly 1.3 million tons “ahead” of the same period in 2009, while imports are virtually unchanged.

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Trade in softwood lumber did not share in the overall increase in imports and exports; both metrics declined in May relative to April. Because the absolute decrease in exports was smaller than that of imports, net exports were less negative in May than in April. Lumber exports were 51 percent higher in May 2010 than a year earlier, while imports are 9 percent higher.

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One of the reasons the jump in the trade deficit was unexpected is because of the dollar’s appreciation between April and May. A weaker dollar makes U.S.-made products relatively more attractive in both the domestic and export markets, but it often worsens the trade deficit because more dollars are required to buy the equivalent volume of imports. Conversely, a stronger dollar stunts demand for domestic products, but can improve the overall trade deficit.
In light of additional dollar appreciation in June, we would not be surprised to see the deficit dip somewhat in the next month or two.

During his State of the Union address, President Obama set a goal of doubling exports in five years; on 7 July, the president said the economy is on track to meet that goal. “Export growth leads to job growth and economic growth,” Pres. Obama said. “At a time when jobs are in short supply, building exports is an imperative.” But the president’s goal of doubling exports by 2015 “is challenging. It’s going to require a very broad set of initiatives,” said Pat Mears, director of international commercial affairs at the National Association of Manufacturers.

So, is the goal realistic? According to international trade statistics from the Census Bureau, U.S. exports of goods and services doubled on a nominal value basis between May 2003 and July 2008; so, there is some precedent for such an achievement. To do so, however, the pace of growth will need to pick up relative to the first four months of this year. A doubling of exports from January 2010 at the average absolute growth rate seen between January and April ($1.46 billion per month) would take until April 2018. Accomplishing the goal would require exports to rise by $2.46 billion every month until January 2015 – a feat that has never been achieved. The fastest average monthly rate of growth over a five-year period was $1.3 billion per month, set between mid-2003 and mid-2008.

The International Monetary Fund recently raised its forecast of global growth for 2010 but downside risks outweigh upside opportunity; also, it is unclear if the level of global growth forecast will be sufficient to fuel the level of U.S. exports necessary to meet the Administration’s goal. Our conclusion, then, is that the goal is possible but not likely, particularly if global growth stagnates and/or the dollar remains as strong as it presently is.

June 2010 Consumer and Producer Price Indices: More Gradual Erosion

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The seasonally adjusted Consumer Price Index for All Urban Consumers (CPI-U) declined 0.1 percent in June, the third consecutive monthly drop. The index has increased 1.1 percent over the last 12 months. As was the case in April and May, a decline in the energy index caused the seasonally adjusted all-items decrease in June. The index for energy decreased 2.9 percent in June, the same decline as in May, with a decline in the gasoline index accounting for most of the decrease. This more than offset an increase in the index for all items less food and energy, while the food index was unchanged for the second month in a row. The index for all items less food and energy (a.k.a., the “core” index) rose 0.2 percent in June after increasing 0.1 percent in May. Increases among a variety of items -- including shelter, apparel, used cars, medical care, tobacco, and recreation -- more than offset declines in the indexes for household furnishings and operations and for airline fares. The 12-month change in the core index remained at 0.9 percent for the third month in a row.

The seasonally adjusted Producer Price Index for Finished Goods (PPI) also moved down in June (by 0.5 percent). This decrease followed declines of 0.3 percent in May and 0.1 percent in April. On an unadjusted basis, prices for finished goods rose 2.8 percent for the 12 months ended June 2010, their third straight month of slowing year-over-year advances.

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At the earlier stages of processing, prices received by producers of intermediate goods moved down 0.9 percent in June (its first decline since July 2009) and the crude goods index dropped 2.4 percent.

Finished goods: In June, over eighty percent of the 0.5 percent decrease in the finished goods index could be traced to prices for consumer foods, which fell 2.2 percent. Also contributing to lower finished goods prices, the index for finished energy goods declined 0.5 percent. By contrast, prices for finished goods other than foods and energy inched up 0.1 percent in June.

Intermediate goods: About two-thirds of the June decrease can be attributed to lower prices for intermediate energy goods, which fell 2.6 percent. The index for intermediate materials less foods and energy also contributed to the overall decline, moving down 0.4 percent. By contrast, prices for intermediate foods and feeds inched up 0.1 percent. On a 12-month basis, prices for intermediate goods climbed 6.4 percent, their seventh consecutive month of year-over-year advances.

Crude goods: For the three months ending in June, crude material prices fell 6.2 percent after moving up 8.2 percent from December to March. In June, about eighty percent of the monthly decrease was due to the index for crude foodstuffs and feedstuffs, which dropped 5.3 percent. Lower prices for crude nonfood materials less energy also contributed to the overall decline, falling 4.8 percent. By contrast, the index for crude energy materials rose 1.7 percent in June.

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With the exception of Pulp, Paper and Allied Products, the forest products-related PPIs we track retreated in June. Other than pulpwood, all of the PPIs are higher than they were a year earlier. Given the recent declines in both Lumber and Wood Products, and Softwood Lumber, we expect the index for Softwood Logs, Bolts and Timber to retreat more quickly during the next several months.

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The figure immediately above and table below provide a better perspective of the relative magnitudes of the indexes and their respective percentage changes.

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June 2010 Industrial Production, Capacity Utilization and Capacity: Data Revisions Muddy the Water a Little

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Industrial production edged up 0.1 percent in June after having risen 1.3 percent in May. For the second quarter as a whole, total industrial production increased at an annual rate of 6.6 percent. Manufacturing output moved down 0.4 percent in June after three months of gains at or near 1 percent. At 92.5 percent of its 2007 average, total industrial production in June was 8.2 percent above its year-earlier level.

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Industrial production of forest products manufacturers dropped off in June – by 2.9 percent for Wood Products and 0.8 percent for Paper.

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The capacity utilization rate at the all-industry remained unchanged in June at 74.1 percent, a rate 5.9 percentage points above the rate from a year earlier but 6.5 percentage points below its average from 1972 to 2009. Not surprisingly, capacity utilization among forest products manufacturers fell in June. In the case of Wood Products, the 2.3 percent retreat broke a three-month streak of increases; Paper, by contrast, has been flip-flopping from month to month, and decreased 0.6 percent in June.

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The Fed’s annual revisions (including changing the base from 2002 to 2007) are perhaps most evident in the capacity numbers – although the overall story is essentially unchanged. The upward trends in industrial production and capacity utilization have not been sufficient to prevent excess capacity from “falling out,” although – at least in the case of all industries – the pace of curtailments appears to be flattening.

As explained in our essay Smokey Bear Economy, rising capacity utilization will slow and ultimately reverse the capacity drawdown. For now, the amount of existing overcapacity helps to keep prices relatively stable at the consumer level because manufacturers can ramp up output with comparatively little difficulty. It will be a different story, though, if and/or when new capacity must be built to meet demand.

Of course, it is nearly impossible to predict with any degree of accuracy when that reversal might occur. In light of our expectation for another recessionary relapse during 2011, our best guess is 2012 at the earliest.

June 2010 U.S. Treasury Statement and May TIC Flows: Foreign Investors Still Sending Cash

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Federal outlays of $319.5 billion and receipts of $251.0 billion added another $68.4 billion to the federal budget deficit in June…

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…bumping the cumulative deficit to just over $1 trillion during the first nine months of the fiscal year. At the current rate, the deficit will total $1.3 trillion by September 30 (the end of the fiscal year), although the Obama administration predicts a shortfall closer to $1.6 trillion. Interestingly, the Treasury’s June deficit figures do not include $142.5 billion in “excess” borrowing (i.e., above that needed to close the outlay-receipt gap). Fiscal year-to-date, the U.S. government has borrowed $290 billion more than needed to close the gap; and $1.5 trillion since FY2007.

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The deficit is having predictable impacts on the total federal government debt held by the public. The debt totaled $12.8 trillion at the end of 1Q2010, or nearly 88 percent of gross domestic product.

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As mentioned above, the shortfall between receipts and outlays has to be made up from somewhere, and borrowing from overseas is a common occurrence. So, how are we doing on that score? According to the Treasury International Capital (TIC) accounting system, foreign inflows have been averaging around $19 billion per month over the three months through May -- well off the $70 billion per month that was common between January 2002 and August 2007 (the date of the first financial scare).

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The three-month average of foreign inflows into short-term securities appear ready to turn positive for the first time since May 2009, despite near-zero yields…

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…while it remains to be seen whether the recent dip in long-term public debt instruments represents a tipping point or just a breather that will subsequently push higher.

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Although net TIC inflows were nearly flat in May, several countries adjusted their Treasury security holdings. China, Japan, OPEC countries and Brazil all trimmed their holdings, while the United Kingdom, the Caribbean banks and the rest of the world added to theirs.

For now, at least, it appears there is sufficient foreign demand for U.S. paper that public and private borrowing costs will remain fairly tame. That could change unexpectedly, however, particularly if other countries follow China’s lead and also downgrade the U.S.’s creditworthiness.

July 2010 Macro Pulse -- More Economic “Stall” Warnings

Executive Summary

The second downward revision of 1Q2010’s change in gross domestic product (GDP) to 2.7 percent is one warning indicator that the U.S. economy may be in the process of stalling. Moreover, it is becoming increasingly evident that a significant share of consumer spending since late 2008 resulted from government transfer payments and tax breaks. But even that government-induced growth was not sufficient to materially lower the jobless rate. Manufacturing appears to be providing some lift for now, as industrial production and capacity utilization both rose in May. However, two other indicators are possibly sending warning signals: New factory orders declined in May and growth in the Institute for Supply Management’s purchasing managers’ index slowed during June

More time will be required to determine whether the downturn in world trade during April was just a false alarm or something about which to be genuinely concerned. Exchange rates could frustrate U.S. exporters’ attempts to expand market share, as the dollar strengthened against the euro in June. The monthly average price of West Texas Intermediate crude oil ticked higher in June despite a stronger dollar, the lagged impacts of a slight setback in consumption in April, and crude stocks that are well above the average five-year range.

Construction in the United States, including the housing market, is sounding the loudest warning. The value of construction put in place declined across nearly all categories during May – public works projects excepted. Hence, the contribution to GDP of private residential fixed investment is at its lowest level since the 1940s.

Click here to read the entire July 2010 Macro Pulse.


Macro Pulse is a compilation of economic developments over the past month that provide context for our complete, 24-month forecast, which is contained in the Economic Outlook newsletter available through Forest2Market. While we note developments on the Macro Pulse blog as they occur, the monthly Macro Pulse newsletter provides a summary and point-of-access to economic conditions over the past 30 days affecting the forest products industry.