Spotted 3 of theses on one 2x2 in my veggie garden. I didn't notice them until recently so the insect may have left long ago.
I'm in Seattle Washington.
I'm leaning towards some sort of caterpillar, possibly a puss moth. The puss moth is found widespread across Europe, and parts of Asia, and Africa. There is a North American puss moth but it is a different species and is found in southern east coast states. I know the user lives in Seattle Washington which isn't mentioned as part of the puss moth range but the photos seem to match. Maybe there is a west coast species I haven't found reference to.
The puss moth caterpillar spins a silk cocoon and scrapes away the bark of the tree to incorporate the bark into its cocoon. This makes a very hard, camouflaged cocoon that the caterpillar overwinters in, emerging as a moth in spring.
Sorry I can't seem to hyperlink from my phone but below are a few references/photos.
http://www.nhm.ac.uk/natureplus/thread/3385
http://www.wildlifeinsight.com/british-moths/puss-moth-caterpillar-cerura-vinula/
This is interesting! I think it is wood pecker damage. Can't understand WHY???