April 2011 Currency Exchange Rates

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The U.S. dollar lost ground against Canada’s “loonie” (-1.9 percent) and the euro (-3.0 percent) but appreciated against the yen (1.9 percent). On a trade-weighted index basis, the dollar depreciated 1.6 percent against a basket of 26 currencies.
 

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Canada: The loonie’s gain occurred despite the lagged impacts of a 0.2 percent contraction in real GDP during February, and appears to be related primarily to rising prices of commodities (especially oil).

Europe: Apart from “unexpected” growth in European services and manufacturing during April, about the only logical explanation for the euro’s rally stems from advantageous interest rate differentials relative to the United States. Certainly the banking crisis and sovereign funding challenges have not gone away, a point driven home by the International Monetary Fund’s comment that “the turbulence in some euro-area financial markets over the past six months suggests that the process [of discovering credit risk] is still ongoing.” Also, rising crude oil prices and a strong euro are chipping away at business confidence.

Japan: The yen weakened as impacts of the March 11 earthquake and tsunami began to be quantified in economic reports. For example, industrial production tumbled by 15.3 percent in March (the worst drop on record). A Reuters poll indicated that nearly 60 percent of Japanese companies experienced disrupted production and supply chains related to the catastrophe. Unsurprisingly, given the magnitude of the disaster, Japan’s trade surplus shrank by 78.9 percent in March from the same month a year earlier. Exports fell for the first time in 16 months, slipping 2.2 percent from a year earlier. The currency markets also reacted to the Japanese government’s downgrade of the country’s economy just two weeks before Standard & Poor’s issued a negative outlook on Japan’s credit rating amid concern the country’s finances will deteriorate further as it rebuilds.

1Q2011 Gross Domestic Product

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The Bureau of Economic Analysis (BEA) estimated 1Q2011 growth in real U.S. gross domestic product (GDP) at a 1.8 percent seasonally adjusted and annualized rate -- down noticeably from the previous quarter’s estimate of 3.1 percent. This revision leaves 4Q GDP growth higher than the 2.6 percent growth rate in 3Q. Personal consumption expenditures (PCE) and private domestic investment (PDI) contributed to growth while government consumption expenditures (GCE) subtracted from it. Net exports (NetX) were a “wash.”
 

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The Consumer Metrics Institute continues to question (legitimately, in our opinion) the reliability of the deflator used to arrive at the real GDP estimate: “Although the price indexes used for this quarter (representing an aggregate 1.9 percent annualized inflation rate) are higher than the credibility-stretching ones used for 4Q2010 (which representing an astonishingly low 0.4 percent annualized inflation rate), they are still significantly lower than the inflationary numbers published by the BEA's sister agencies. The Bureau of Labor Statistics (BLS) has most recently reported that the quarter ending year-over-year CPI-U rate for all items was 2.7 percent, even as the foreign trade price indexes showed year-over-year changes in excess of 9 percent. The importance of persistently low deflaters cannot be over emphasized: if the year-over-year CPI-U at the end of 1Q is used as an alternate deflater, real final sales actually contracted during the first quarter. Even more alarming: using the first quarter's average monthly CPI-U rates (a 5.75 percent annualized rate) would cause the entire GDP to be contracting at over a 2 percent rate.”

February 2011 International Trade

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According to data compiled by the Netherlands Bureau for Economic Policy Analysis, world trade volume increased 0.3 percent in February from the previous month, after an upwardly revised rise of 1.7 percent in January. World imports declined a bit, particularly in the United States, Japan and Asia. Export volumes increased slightly in most regions, the major exceptions being the United States and Latin America.

Prices jumped 1.6 percent between January and February, and are now up 20.4 percent from their February 2009 low.
 

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The U.S. goods and services deficit shrank to $45.8 billion in February, down from $47.0 billion in January. Exports totaled $165.1 billion and imports $210.9 billion.
 

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Paper exports and imports both shrank in February: exports by 228,000 metric tons (7.5 percent) and imports by 14,000 tons (3.8 percent). Both metrics remained above year-earlier levels, however: exports +180,000 tons (6.9 percent) and imports +12,000 tons (3.3 percent).
 

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Softwood lumber exports rose by 18 MMBF (15.4 percent) in February while imports fell by 34 MMBF (4.9 percent). Exports were 41 MMBF (44.3 percent) higher than year-earlier levels, but imports 73 MMBF (10.0 percent) lower.

March 2010 U.S. Treasury Statement and Debt Overview

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The United States’ public debt stood at $14.025 trillion as of the end of December 2010, more than double the level of a decade earlier. As can be seen from the charts above and below, a little over 90 percent of that calendar year-end 2010 debt was held by federal intra-governmental holding accounts (over half of which was comprised of the Federal Old-Age and Survivors Insurance Trust Fund, a.k.a., Social Security), and foreign and domestic investors of various types. The Federal Reserve held the remaining 7.2 percent. China, Japan and the United Kingdom were the three largest foreign holders of U.S. debt.
 

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Interestingly, roughly three-fourths (76 percent) of the debt added during 2010 was underwritten by foreign and private domestic investors. Since Europe’s sovereign debt problems heightened during that timeframe, we suspect safe-haven buying of U.S. Treasuries was an important explanation for why those investor classes behaved as they did.
 

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The debt picture has continued to worsen since December. The total public debt outstanding grew to $14.270 trillion by the end of March 2011, a change of $245 billion in just three months. Because the debt is growing, tax receipts since the beginning of FY2011 (i.e., October 1, 2010) obviously have not kept pace with budget outlays. Indeed, the red ink deepened again in March as outlays of $339.0 billion and receipts of $150.9 billion added another $188.2 billion to the federal budget deficit.
 

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Foreigners have been stepping into the funding gap. The amount of U.S. public debt held by foreigners is homing in on $4.5 trillion. China remained the largest foreign creditor in February ($1.154 trillion) despite selling $0.6 billion of Treasury securities. Great Britain, on the other hand, purchased $17.6 billion in February -- a 6.3 percent increase from January.
 

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The Federal Reserve has surpassed both China and Japan in terms of U.S. Treasury holdings ($1.213 trillion). Furthermore, were the Fed to maintain its February rate of Treasury purchases for a year, it would essentially double its current holdings. As mentioned above, China was a net seller in February, while Japan’s pace of purchases was comparatively slow. As mentioned above, the U.K.’s pace of purchases picked up in February, and would nearly double its holdings if maintained for another year.

More recent data shows the Fed has ramped up purchases of U.S. Treasury debt since February, and held $1.375 trillion as of mid-April.
 

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The rising three-month-average net inflows shown by the Treasury International Capital (TIC) accounting system indicate that more money flowed into the United States than flowed out in February. Net inflows jumped by $67 billion, raising the moving average to nearly $60 billion per month.

March 2011 Consumer and Producer Price Indices

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The seasonally adjusted Consumer Price Index for All Urban Consumers (CPI-U) increased 0.5 percent in March on a seasonally adjusted basis. Over the last 12 months, the all items index increased 2.7 percent before seasonal adjustment.

Gasoline and food prices continued to rise and together accounted for almost three quarters of the seasonally adjusted all-items increase in March. The gasoline index posted its ninth consecutive increase and has now risen 14.4 percent over the last three months. The household energy index rose as well, with advances in the fuel oil and electricity indexes more than offsetting a decline in the index for natural gas.

The seasonally adjusted Producer Price Index for Finished Goods (PPI) rose 0.7 percent in March, seasonally adjusted. This advance followed a 1.6-percent increase in February and a 0.8-percent gain in January. At the earlier stages of processing, prices received by manufacturers of intermediate goods climbed 1.5 percent in March and the crude goods index declined 0.5 percent. On an unadjusted basis, prices for finished goods moved up 5.8 percent for the 12 months ended March 2011, the largest year-over-year gain since a 5.9-percent advance in March 2010.
 

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Details at different stages of processing include:

Finished goods -- In March, nearly ninety percent of the increase in the finished goods index can be attributed to a 2.6-percent rise in prices for finished energy goods. Also contributing to the advance in the finished goods index, prices for goods other than foods and energy moved up 0.3 percent. By contrast, the index for finished consumer foods moved down 0.2 percent in March.

Intermediate goods -- This index moved up 1.5 percent in March, the eighth consecutive advance. The broad-based March increase was led by prices for intermediate energy goods, which rose 2.9 percent. The indexes for intermediate goods less foods and energy and for intermediate foods and feeds also were factors in the intermediate goods advance, moving up 0.9 percent and 2.2 percent, respectively. For the 12 months ended March 2011, prices for intermediate goods climbed 8.9 percent, the largest advance since rising 9.8 percent in October 2008.

Crude goods -- The crude-goods index fell 0.5 percent in March. For the 3 months ended in March, prices for crude materials advanced 6.2 percent, subsequent to a 13.0-percent jump for the 3 months ended December 2010. Leading the monthly decrease in March, the index for crude nonfood materials less energy fell 2.3 percent. Also contributing to this decline, prices for crude energy materials moved down 0.5 percent. By contrast, the index for crude foodstuffs and feedstuffs rose 0.3 percent in March.
 

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In the forest products sector, most indices (except pulpwood and softwood logs) we track moved higher in March. Except for pulpwood, prices are all higher than year-earlier levels although the rate of growth has slowed in several cases.
 

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March 2011 Industrial Production, Capacity Utilization and Capacity

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Industrial production increased 0.8 percent in March and rose at an annual rate of 6.0 percent for the first quarter as a whole. Manufacturing output advanced 0.7 percent in March, its fourth consecutive month of strong expansion; factory production climbed at an annual rate of 9.1 percent in the first quarter. At 93.6 percent of its 2007 average, total industrial production was 5.9 percent above its year-earlier level. Wood Products industrial production rose by 1.6 percent, while Paper increased by 1.9 percent.
 

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The rate of capacity utilization for total industry rose 0.7 percent to 77.4 percent, a rate 3.0 percentage points below its average from 1972 to 2010. Growth in manufacturing capacity utilization matched that of total industry. Wood Products increased by 1.9 percent, and Paper by 2.0 percent.
 

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Capacity at the all-industries and manufacturing levels crept higher (0.1 percent); Wood Products dropped by 0.2 percent while Paper was unchanged.

April 2011 Macro Pulse -- The “Gulliver” Economy

Gulliver was a character in a Jonathan Swift novel who, when washed ashore after being shipwrecked, awoke on the beach only to discover that the island’s diminutive inhabitants, the Lilliputians, had tethered him to the ground. Gulliver is a fitting metaphor for the U.S. economy: it survived a “shipwreck” of a recession but numerous risk factors now constrain it from achieving full recovery and could tip it back into recession. Like the Lilliputians’ ropes that kept Gulliver prostrate in the sand, any one of those risk factors could hardly prevent the economy from rising to its feet; collectively, however, they prove a formidable restraint. Some of those risk factors include….


Click here to read the entire April 2011 Macro Pulse recap.

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.