October 2011 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil ticked higher in October, advancing by $0.80 (0.9 percent) to $86.41 per barrel. That rise coincided with the lagged impacts of an increase in consumption of 598,000 barrels per day (BPD) -- to 19.2 million BPD -- during August and a continued drop in crude stocks during October, but occurred despite a slightly stronger dollar. Although Brent crude (the predominant grade used in Europe) appeared to be cheaper than WTI in September (October data was not yet available at the time of this writing), it was in fact over $27 per barrel more expensive than WTI on a U.S.-dollar basis ($112.83 versus $85.61, respectively).
 

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October 2011 Currency Exchange Rates

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The U.S. dollar lost ground against the yen (0.2 percent) but appreciated against the euro (0.1 percent) and Canada’s “loonie” (1.7 percent). On a trade-weighted index basis, the dollar gained 0.9 percent against a basket of 26 currencies. The dollar is once again at its weakest since January 2000 relative to the yen.
 

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3Q2011 Gross Domestic Product: Advance Estimate

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The Bureau of Economic Analysis (BEA) estimated 3Q2011 growth in real U.S. gross domestic product (GDP) at a seasonally adjusted and annualized rate of 2.5 percent, up from 1.3 percent in 2Q and the highest reading in a year. Personal consumption expenditures (PCE), private domestic investment (PDI) and net exports (NetX) contributed to 3Q growth in that order, while government consumption expenditures (GCE) were a “wash.”
 

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We cannot attribute most of the growth to a suspect GDP deflator (the statistic used to remove the effect of price changes from the real GDP estimate), because it is back in line with changes in both the consumer and producer price indices. (We discussed this topic in an earlier “Clearing the Mist” blog post.)
 

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Nonetheless, we find the GDP growth estimate -- and particularly the PCE component -- somewhat suspect in light of sour consumer sentiment reported by both Reuters/University of Michigan and The Conference Board.
 

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Interestingly, the 3Q GDP improvement has not negated the recession “call” made by Federal Reserve analyst Jeremy Nalewaik. Nalewaik’s analysis correlated the onset of recessions with a fall in the year-over-year change in gross domestic product (GDP) below 2 percent. Since 1947, the U.S. economy either was already or soon would be in recession each time the year-over-year change in GDP fell below 2 percent (the red dashed line in the figure above). The year-over-year GDP change was essentially unchanged at 1.6 percent in 3Q.

August 2011 International Trade

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According to data compiled by the Netherlands Bureau for Economic Policy Analysis, world trade volume rose by 1.3 percent in August from the previous month, following a revised increase of 1.0 percent in July. Import growth picked up in the Euro Area and, particularly strongly, in emerging economies. Exports from emerging Asia declined, however, as did exports from the United States. Euro Area exports continued to expand vigorously.

Prices rose 2.9 percent in August, to 26.9 percent above their February 2009 low.
 

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The U.S. goods and services deficit was virtually unchanged in August from July’s upwardly revised $45.6 billion. Exports totaled $177.6 billion, while imports totaled $223.2 billion.
 

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Paper exports increased by 19,000 tons (0.6 percent) in August, and imports expanded by 30,000 tons (7.7 percent). Exports remained 320,000 tons (11.2 percent) above year-earlier levels, and imports were 13,000 tons (3.2 percent) higher.
 

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Softwood lumber exports rose by 13 MMBF (9.1 percent) in August while imports retreated by 22 MMBF (2.8 percent). Exports were 35 MMBF (29.3 percent) higher than year-earlier levels, and imports were 28 MMBF (3.8 percent) higher.

September 2011 Consumer and Producer Price Indices

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The seasonally adjusted Consumer Price Index for All Urban Consumers (CPI-U) increased 0.3 percent in September. Over the last 12 months, the all-items index increased 3.9 percent before seasonal adjustment.

Increases in energy and food indexes were the main cause of the seasonally adjusted all items increase. The gasoline index continued to rise, and indexes for electricity and natural gas increased as well. Broad increases in food indexes also continued in September, with the food at home index rising 0.6 percent for the third month in a row and no major grocery store food group indexes declining.

The seasonally adjusted Producer Price Index for Finished Goods (PPI) rose 0.8 percent in September. Finished goods prices were unchanged in August and increased 0.2 percent in July. At the earlier stages of processing, prices received by manufacturers of intermediate goods moved up 0.6 percent in September, and the crude goods index advanced 2.8 percent. On an unadjusted basis, prices for finished goods climbed 6.9 percent for the 12 months ended September 2011.
 

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Details at different stages of processing include:

Finished goods -- In September, the increase in the index for finished goods was broad based, with prices for finished energy goods rising 2.3 percent, the index for finished goods less foods and energy moving up 0.2 percent, and prices for finished consumer foods advancing 0.6 percent.

Intermediate goods -- This index climbed 0.6 percent in September after falling 0.5 percent in August. Over two-thirds of this broad-based advance can be traced to prices for intermediate energy goods, which rose 1.7 percent in September. The indexes for intermediate goods less foods and energy and for intermediate foods and feeds also contributed to the increase in intermediate goods prices, moving up 0.2 percent and 0.9 percent, respectively. For the 12 months ending September 2011, the intermediate goods index jumped 10.5 percent.

Crude goods -- The index for crude goods moved up 2.8 percent in September. For the three-month period ending in September, prices for crude materials advanced 1.8 percent following a 1.1 percent decrease from March to June. In September, the monthly increase in the crude goods index is mostly attributable to prices for crude energy materials, which jumped 7.7 percent. Also contributing to the September climb was the index for crude nonfood materials less energy, which advanced 1.0 percent. By contrast, prices for crude foodstuffs and feedstuffs moved down 0.9 percent.
 

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The price indexes for the forest products that we track either rose very little or declined; also, with only a couple of exceptions, the pace of increases slowed on a year-over-year basis.
 

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September 2011 U.S. Treasury Statement and Debt Overview

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Outlays of $304.7 billion and receipts of $240.2 billion added another $64.5 billion to the federal budget deficit in September, a month that typically sees revenue slightly exceeding outlays. That brought the FY2011 U.S. federal deficit to $1.299 trillion ($5 billion higher than FY2010), and the federal debt held by the public stood at $14.790 trillion at the end of September.
 

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Foreigners held $4.573 trillion, or 31 percent of the U.S. public debt at the end of August. China remained the largest foreign creditor ($1.137 trillion). The United Kingdom was the biggest buyer in absolute terms ($43.8 billion; 12.4 percent), while the Caribbean banks had the largest percentage change ($32.5 billion; 25.3 percent). Holdings by the “other” (aggregated) category inched up in August after having trended lower since last November.
 

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The Federal Reserve continued to put more distance between itself and both China and Japan during August in terms of U.S. Treasury holdings. However, the Fed’s pace of net Treasury purchases has slowed considerably. China divested itself of some Treasuries (although the U.K. often serves as a proxy buyer for China) while Japan added modest amounts to its holdings.
 

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According to the Treasury International Capital (TIC) accounting system, flows into the United States for all types of investments broke off a four-month slide and amounted to $89.6 billion in August -- evidenced by the sharp jump in the three-month-average of net inflows.
 

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One item that bears watching is the large sell-off of U.S. Treasuries since September. The Federal Reserve holds those securities in custody for various foreign central banks. Since September, those central banks have divested themselves of $73.9 billion in Treasuries, the greatest amount on record. The concern over this development is two-fold: 1) The August 2007 sell-off either triggered -- or at least was associated with -- the first credit crisis that eventually turned into the December 2007 recession. 2) Should central bank selling continue, the Fed may become the buyer of last resort, which would likely result in higher interest rates and inflation.

September 2011 Industrial Production, Capacity Utilization and Capacity

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Industrial production increased 0.2 percent in September after having been unchanged in August. Previously, industrial production was reported to have stepped up 0.2 percent in August. For the third quarter as a whole, industrial production rose at an annual rate of 5.1 percent. Manufacturing output moved up 0.4 percent in September after having gained 0.3 percent in August. At 94.2 percent of its 2007 average, total industrial production for September was 3.2 percent above its year-earlier level. Output increased at both Wood Products and Paper plants: respectively, 2.4 and 1.1 percent.
 

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Capacity utilization for total industry edged up to 77.4 percent, a rate 1.7 percentage points above its level from a year earlier but 3.0 percentage points below its long-run (1972-2010) average. Manufacturing capacity utilization also rose by 0.3 percent from August. Wood Products and Paper capacity utilization both advanced: respectively, 2.6 and 1.2 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 declined by 0.1 percent.