2Q2010 GDP: Growth Rate Revised Down by One-Third

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The Bureau of Economic Analysis reduced the 2Q2010 growth rate in real gross domestic product (GDP) by one-third (from 2.4 to 1.6 percent), reflecting a smaller rise in inventories and a wider trade gap than initially estimated.

"The economy has slowed a bit and will probably continue to slow through the second half," said John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina. "We're skating on thin ice, and we don't have a lot of margin for error."

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Other noteworthy details from the latest GDP report:

• The trade gap in 2Q widened to $445 billion, compared with an initial estimate of $425.9 billion, subtracting 3.37 percentage points from growth, the biggest reduction since record-keeping began in 1947. Imports grew at a 32.4 percent pace, the most since 1984, while exports increased by only 9.1 percent.
  
  
• Analyst Vincent Fernando pointed out that government spending comprised over half (0.86 percentage point) of the 1.6 percent GDP growth value -- one of the highest quarterly government contribution to GDP since at least 2007. The only quarters to beat it since the beginning of 2007 were 3Q2008 and 2Q2009 (+1.04 and +1.24 percentage points, respectively).
  
  
• Although overall private domestic investment remained smaller relative to 1Q2010, contributions to growth from both residential and nonresidential fixed investment increased in 2Q.

If there are any silver linings in what could be construed as discouraging data, these might be worthy of mention:

• Whatever the reason for the outsized drag from net exports, Federal Reserve Chair Bernanke does not expect it to be repeated: "Like others, we were surprised by the sharp deterioration in the U.S. trade balance in the second quarter. However, that deterioration seems to have reflected a number of temporary and special factors. Generally, the arithmetic contribution of net exports to growth in the gross domestic product tends to be much closer to zero, and that is likely to be the case in coming quarters."

• Another mildly encouraging detail, brought to our attention by James Hamilton, involves the first estimate of 2Q gross domestic income (GDI). According to economic theory, GDI should be exactly the same number as GDP. In practice, however, GDI and GDP often return slightly different results since they are constructed in part from different sources. Federal Reserve economist Jeremy Nalewaik has argued that GDI is sometimes a better measure than GDP for tracking the business cycle. The rate of growth of GDI has been coming in a little better than GDP lately. GDI showed a 2.3 percent annual growth rate for 2Q, about the same rate as the BEA’s initial estimate of GDP.
  

June 2010 International Trade: Higher Global Volumes Translate Into Wider U.S. Trade Gap

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According to data compiled by the Netherlands Bureau for Economic Policy Analysis, world trade volume increased by 0.7 percent in June from the previous month, following an upwardly revised increase of 2.3 percent in May. Trade growth during 2Q2010 accelerated in advanced economies, but fell back considerably in most emerging regions. As a result 2Q2010 world trade growth slowed to 3.6 percent (compared to 5.7 percent in 1Q and 6.1 percent in 4Q2009).

Although the volume of trade has increased since year-end 2009, price changes have not followed suit; in fact, prices have been trending lower since early 2010, and in June were 4.3 percent below their November-to-January plateau.

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Turning to the United States, the U.S. trade deficit widened sharply in June to the highest level in 20 months on rising imports from China, and waning exports. The trade gap grew at its fastest monthly pace on record (18.8 percent), reaching $49.9 billion and threatening to erode already slow economic growth. Imports increased 3.0 percent to $200.3 billion while exports declined 1.3 percent to $150.5 billion.

The trade gap is "bad news for real GDP growth in the United States, which will be further reduced by the effects of rising imports," said Moody's Economy.com's economist Christopher Cornell. Nigel Gault, an economist at IHS Global Insight, said the June deficit figure means that the government will trim its estimate of overall economic growth from an already sub-par 2.4 percent to 1.2 percent when it releases a revised estimate on August 27.

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U.S. trade in wood pulp, paper and paperboard was essentially flat in June (relative to May), with imports outpacing exports by about 6,000 metric tons. Exports were off year-earlier levels by 2.9 percent while imports were 18.2 percent higher.

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Trade in softwood lumber was one of the factors contributing to the widening trade gap. Exports fell back by two million board feet (MMBF), or 1.8 percent, between May and June while imports jumped by 135 MMBF (16.4 percent). Exports are 30 MMBF (37.5 percent) ahead of year-earlier levels, but imports have risen by 176 MMBF (22.5 percent).

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With the U.S. dollar weakening in July against a basket of other currencies, we would not be surprised to see the July trade gap widen even more. 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 improves the overall trade deficit.

July 2010 Consumer and Producer Price Indices: Where’s the Deflation?

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The seasonally adjusted Consumer Price Index for All Urban Consumers (CPI-U) increased 0.3 percent in July; before seasonal adjustment, the all items index was unchanged for the month. Over the last 12 months, the index increased 1.2 percent before seasonal adjustment.

The energy index posted its first increase since January and accounted for over two thirds of the seasonally adjusted all-items increase. Both the gasoline and household energy indexes turned up in July after a series of declines. By contrast, the food index declined in July, largely due to the fourth consecutive decline in the fruits and vegetables index.

The index for all items less food and energy rose 0.1 percent in July after increasing 0.2 percent in June. The 12-month change in the index for all items less food and energy remained at 0.9 percent for the fourth month in a row.

The seasonally adjusted Producer Price Index for Finished Goods (PPI) rose 0.2 percent in July. This advance followed a 0.5-percent decline in June and a 0.3-percent decrease in May.

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At the earlier stages of processing, prices received by manufacturers of intermediate goods moved down 0.4 percent in July and the crude goods index rose 2.7 percent. On an unadjusted basis, prices for finished goods advanced 4.2 percent for the 12 months ended July 2010, their ninth consecutive 12-month increase.

Finished goods: The increase in the index for finished goods can be traced to higher prices for finished goods other than foods and energy, which rose 0.3 percent. Also contributing to the advance in finished goods prices, the index for consumer foods moved up 0.7 percent. By contrast, the finished energy goods index fell 0.9 percent in July. Prices for finished goods have risen 4.2 percent during the past 12 months.

Intermediate goods: The index for Intermediate Materials, Supplies, and Components moved down 0.4 percent in July, its second straight decrease. Prices for both intermediate materials other than foods and energy and for intermediate foods and feeds fell 0.4 percent in July. The index for intermediate energy goods decreased 0.7 percent. On a 12-month basis, prices for intermediate goods climbed 6.4 percent for the second consecutive month.

Crude goods: The index for Crude Materials for Further Processing moved up 2.7 percent; almost two-thirds of the monthly increase came from crude energy materials, which moved up 4.5 percent. Also contributing to the July increase, prices for crude foodstuffs and feedstuffs rose 3.3 percent. By contrast, the index for crude nonfood materials less energy moved down 1.4 percent in July.

Our reaction to the CPI and PPI data is consistent with that of Russell Price, a senior economist at Ameriprise Financial Inc. in Detroit, who opined that "we're going to avoid an outright bout of deflation."

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The price index for pulpwood jumped a rather substantial 5.7 percent in July, which in turn helped push the change in the Pulp, Paper & Allied Products index into mildly positive territory (0.2 percent). The other forest products-related price indices declined between June and July.

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All of the indices are higher than a year earlier, but -- except for Pulp, Paper & Allied Products -- the rates of increase have slower than their previous peaks.

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July 2010 Industrial Production, Capacity Utilization and Capacity: Overall Capacity Losses at a Virtual Standstill

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According to the Federal Reserve's G.17 report, industrial production edged up by 1.0 percent in July (the fifth monthly increase this year), reversing June’s 0.1 percent decline. Much of the jump in manufacturing output was attributed to an increase of nearly 10 percent in the production of motor vehicles and parts; even so, manufacturing production excluding motor vehicles and parts advanced 0.6 percent. The output of mines rose 0.9 percent; and utilities, +0.1 percent. At 93.4 percent of its 2007 average, total industrial production in July was 7.7 percent above its year-earlier level.

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Industrial production among forest products manufacturers split, with Paper gaining 0.5 percent (returning to a level last seen in 4Q2008) and Wood Products dropping by 1.2 percent (on par with January 2009).

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That pattern of monthly changes was repeated in capacity utilization. Capacity utilization among all industries rose 1.0 percent in July; Paper gained 0.7 percent while Wood Products lost 0.7 percent.

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Although additional forest products manufacturing capacity was shuttered in July, perhaps the most noteworthy aspect of the report was that the fall-off at the all-industries level slowed to a virtual standstill. It remains to be seen whether that outcome signals an impending turnaround or is just a pause in the downward trend. Our guess would favor the latter option given all of the other headwinds challenging the U.S. economy at the moment; but, as we have previously indicated, rising capacity utilization will slow and ultimately reverse the capacity drawdown. For now, the amount of existing excess capacity helps to keep prices relatively stable at the consumer level because manufacturers can ramp up output with existing production infrastructure. It will be a different story, though, if and/or when new capacity must be built to meet demand.

July 2010 U.S. Treasury Statement and June TIC Flows: Status Quo -- For Now

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Federal outlays of $320.6 billion and receipts of $155.5 billion added another $165.0 billion to the U.S. federal budget deficit in July…

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…bumping the cumulative deficit to just under $1.2 trillion during the first ten months of this fiscal year (which ends on September 30). If the revenue shortfall during the final two months is equivalent to last year, the deficit will total $1.32 trillion -- $280 billion better than the $1.6 trillion assumed in the White House budget.

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The shortfall between receipts and outlays has to be made up from somewhere, and borrowing from overseas is one of the main ways of accomplishing that. According to the Treasury International Capital (TIC) accounting system, foreign inflows went negative in June (i.e., more money flowed out of the United States than in), which helped pull the most recent three-month average rate down to $19.5 billion per month. That is far below the $70 billion per month typical of the period between January 2002 and August 2007 (the date of the first financial scare).

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Flows into short-term securities (e.g., Treasury bills) expanded and contracted during the past three months as the markets alternated between desires for safe-haven and riskier investments; on average, monthly flows were negative.

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Despite rumblings of impending U.S. debt problems, net inflows into long-term public debt (e.g., Treasury bonds) were still safely in positive territory ($51.5 billion) in June -- although well below the $130.8 billion peak of March. Flows into private equities, on the other hand, have been negative during two of the past three months (the first back-to-back outflows since February 2009), causing the three-month average to “head south” in June. One question that occurs to us: Is this a case of public sector debt “crowding out” the private sector?

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The amount of U.S. public debt held by foreigners broke the $4 trillion dollar mark for the first time in June. China is still the single largest holder, but its net sales of $24 billion (China's largest sale ever) in June put Japan within striking distance of retaking the top spot. China has instead been “loading up” on Japanese government and European bonds. "Diversification should be a basic principle," said Yu Yongding, former adviser to the People's Bank of China, who added that a "top-level Chinese central banker" told him to convey to European policy makers China's confidence in the region's economy and currency. "We didn't sell any European bonds or assets, instead we bought quite a lot."

Sales by OPEC countries were also significant ($12 billion). Japan and the United Kingdom were net buyers ($16.9 and $12.2 billion, respectively) while the “other” countries picked up $55.9 billion.

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Central banks hold the “lion’s share” of Treasury securities, although the private sector has become a much bigger player during the past several months. T-bills are gradually becoming less attractive to central banks (not surprising given the almost-nonexistent interest being paid on those instruments).

Why should the forest products industry care about this topic? Because borrowing costs (interest rates) will remain relatively low and prices relatively stable as long as the United States can continue attracting foreign investment. If foreigners find more lucrative markets elsewhere (either because of interest rate differentials or because of a sudden loss of faith in the U.S.’s fiscal outlook) the United States will be forced to either pay higher interest rates to attract capital or risk price inflation by “printing” more money (most likely, both).

August 2010 Macro Pulse -- Downdraft

With growth of 2Q2010 real gross domestic product (GDP) coming in at only 2.4 percent – the second quarterly slowdown in the rate of growth – it appears the U.S. economy is caught in a downdraft and heading toward a period of mediocre growth or outright recession. The consumption-dependent U.S. economy is struggling because of drags from persistently high unemployment (especially among young adults) and households either paying down or defaulting on debt.

Foreward-looking manufacturing data provided conflicting views of the future, with various reports showing either shrinking and expanding new orders. New non-manufacturing orders, by contrast, grew at a faster pace in July. Regardless, a drop-off in the availability/desirability of credit is among the factors hampering the ability of businesses to expand operations and hire employees.

Builders completed a significantly higher number of homes in June but had few new projects to turn to. Prospects for a substantial improvement in housing are slim as total permits nudged barely higher in June. Sales of new homes were fairly brisk by recent standards, while resales declined.

Interest rates are presently at/near historic lows; but because of continued deficit spending and corporate re-financings, competition for credit will eventually drive interest rates higher.

A weaker dollar and realization the United States is no longer the world’s largest energy consumer pushed crude oil’s spot and futures prices higher in July.

Click here to read the entire August 2010 Macro Pulse newsletter, which contains an explanation of the graph shown above.

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 and gives a convenient point of access to the previous 30 days of commentary available on this website.

July 2010 Employment Report: Lackluster

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Total U.S. nonfarm employment fell by 131,000 in July, the second consecutive monthly decline, but the unemployment rate remained unchanged at 9.5 percent, according to the U.S. Bureau of Labor Statistics (BLS). Federal government employment fell, as 143,000 temporary workers hired for the decennial census completed their work, while private-sector payroll employment edged up by 71,000.

Some observers argue that July’s job-loss figure was actually worse than it appeared, because the BLS revised June’s figure from -125,000 to -221,000. Had June’s number been left unrevised, July’s change in employment would have been -227,000 instead of -131,000 (-96,000 - 131,000 = -227,000).

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It is not unusual for employment numbers to suffer a setback or two during the economic recovery phase, but it is somewhat disconcerting to see back-to-back months of job losses. This is a census year, however, so perhaps this time is truly different.

One encouraging observation is that the annual percentage change in private employment returned essentially back to the break-even point in July. As one analyst put it, “at least we’re not dropping off a cliff anymore – at least temporarily.”

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Because 143,000 Census workers were given their “walking papers” but 202,000 government employees lost their jobs, that implies other (presumably, mostly full-time) employees were also let go. Indeed, as the table above shows, that is precisely what happened; the bulk of those lost government jobs occurred at the local level.

Other details from the employment report include:

• The number of unemployed persons (14.6 million) was unchanged.
• The number of long-term unemployed (those jobless for 27 weeks and over) was little changed at 6.6 million. These individuals made up 44.9 percent of unemployed persons.
• The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) was essentially unchanged over the month at 8.5 million but has declined by 623,000 since April.
• About 2.6 million persons were marginally attached to the labor force, an increase of 340,000 from 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 (those not currently looking for work because they believe no jobs are available for them). The remaining 1.4 million persons had not searched for work in the four weeks preceding the survey for various reasons
• The average workweek for all employees on private nonfarm payrolls increased by 0.1 hour to 34.2 hours.
• Average hourly earnings of those employees increased by $0.04 (0.2 percent) to $22.59 in July.