Weekly Market Update - April 21, 2016

Global GDP and the IMF Forecast through 2021: Global growth slowed in 2015 according to the April update from the IMF. Growth in 2015 was reported to be 3.09%, down from 3.41% in 2014. Growth in 2016 is forecast to be 3.16%. Fig. 1 shows the growth of global GDP since 1970 with the April IMF forecast through 2021. The collapse of the commodity bubble in 2008 coincided with the US banking and housing crisis setting up the perfect storm. Global growth has been unusually flat in the years 2012 through 2015 followed by a forecasted steady growth through 2021. Prior to the 2001 recession, the US held its own in the economic growth stakes but between 2001 and 2008, growth in the US averaged 1.84% less per year than the growth of the global economy as a whole, (Fig. 2). In the years 2011 through 2014 the gap narrowed to 0.98% and in 2015 was 0.66%. The difference is forecast to widen to 1.88% in 2021. Global growth is now projected to gradually climb back to 3.9% in 2021. The US has outperformed the Eurozone in every year since 2008 and is forecast to continue to do so through 2021, (Fig. 3). The gap will narrow as we approach the end of this decade. Fig. 4 shows the growth comparison between developing economies and the advanced economies, that gap is projected to widen in the second half of this decade. Within NAFTA, the growth of GDP of all three nations coincided in 2014. Mexico and the US will track each other through 2017 as Canada lags. Canada and the US are forecasted to converge in 2019 (Fig. 5). There is a relationship between the growth of GDP and steel demand at both the international and national level which also extends to other commodities such as cement. The cyclical change in steel demand is vastly more volatile than the change in GDP which we attribute to the inventory response throughout the supply chain and over the long term 1% growth in GDP does not result in the same increase in steel demand. At the global level it takes a 2.8% increase in GDP to get any increase in steel demand. In the US that figure is about 2%. If the IMF forecast proves to be correct then the growth in global steel demand will improve to around 3% by 2017. This is much better than current World Steel Association short range outlook published in April which has global demand increasing by only 0.4% in 2017.

Fig 1

Fig 2

Industrial Construction Starts were down 14.1% y/y in April and have now fell for seven consecutive months and 10 of the past 12 months. On a 3 month y/y basis starts were down 9.0%. Momentum came in at a positive 5.1%, the third month in the positive column after a string of six months of declines. As Fig. 6 shows, industrial starts have always been extremely volatile. Industrial manufacturing projects rebounded sharply this month, rising 102.4%, 3 months y/y, and have now improved for four months in a row after falling 8 of the previous 9 months on a 3 month y/y basis. Oil and gas terminals surged 780% on the heels of a 280% jump in the previous month, this after seven months in a row of double digit declines. Other project categories recording double digit growth, 3 months y/y include: Metals & minerals, Pulp, paper & wood, Petroleum refining and Food & beverage, (Table 1).

Fig. 7 presents a bar graph of project classes comparing YTD expenditures for 2014, 2015 and 2016. Power projects have ranked number one for several years but so far in 2016 have been surpassed by industrial manufacturing. Not surprisingly with the current price of oil in the neighborhood of $40 per barrel, production (oil & gas) illustrates the greatest decline in YTD expenditures. Fig. 8 presents a map of the US showing the rolling 12 month total expenditure and the 12 month y/y change. On a percentage basis the Northeast (+70.2%) and West North Central (+41.0%) show the strongest growth. Laggards include; The Mountain region (-39.3%) and the West South Central (-39.0%).

Fig 6

Architectural Billings Index: In an encouraging sign for future non-residential construction, the national ABI moved up 1.6 points month on month to 51.9 in March, (Fig. 9). Regionally the South recorded the strongest demand for design services at 52.4, followed by the Northeast (51.0), West (50.4). The only region posting a value of less than 50 (threshold for expansion, i.e. >= expansion, < 50= contraction), was the Midwest with a 49.8. The commercial / industrial sub-index remained in positive territory with a score of 51.8, while the institutional score drifted downward to contraction zone with a reading of 48.0, (Fig. 10). Kermit Baker, Hon. AIA, PhD, quoted the following in the AIAs April 20th press release: “The Midwest is lagging behind the other regions, but otherwise business conditions are generally healthy across the country. As the institutional market has cooled somewhat after a surge in design activity a year ago, the multi-family sector is reaccelerating at a healthy pace.”

Fig 9

US Housing Starts and Permits: Total housing starts through March were at a seasonally adjusted (SA) annual rate of 1,089,000, down 105,000 from February, falling 8.8% month over month. The 3 month moving average for housing starts charted on Fig. 11 shows starts rose 15.9% year over year, up double-digits y/y. Housing starts 3MMA by region shown in Fig. 12, smooths out the volatility in the month to month changes in the data. The 3MMA for starts in the South (-1.9%), Midwest (-2.9%) and Northeast (-9%) fell in March from February, while the Western region rose 1.5%. Multi-family starts rose 1.9% y/y, as single-family builds rose 23.2% y/y. Fig. 13 shows the ratio of single-family to multi-family. Until 2008 for every single-family unit, 4-6 multi-family units were constructed. As lending practices eased, home ownership rose and this ratio fell to 2. During the great recession home ownership fell and this ratio skyrocketed to 7-8 multi-family projects for every single-family home built. With the current improved single-family starts, this ratio has risen to 2.4.

Table 2 shows the 3MMA for multi-family permits and starts. Both rose slowly, as growth in single-family starts outpaced permits, indicating positive momentum for single-family housing. March permits totaled 1,086,000 (SA), down 7.7% m/m. Single-family permits fell to 764,000, down 1.2% m/m, as multi-family permits totaled 325,000, down 7.9% m/m, (Fig. 14). Year over year single-family permits were up 13.8% while multi-family was flat, up just 0.5% y/y. Permits for multi-family housing units have fallen for 4 consecutive months and are down 35% from November, as planning waned for new structures with 5 units or more. With the April 19th release of the National Association of Home Builders index, NAHB Chief economist Dietz described builder confidence levels as “…overall positive in spite of monthly declines on the multifamily front”.

Fig 11

Fig 12

Chicago Fed National Activity Index: The CFNAI fell to -0.44 in March to its lowest level since February 2014. It has now been below the zero threshold for economic expansion for 13 consecutive months, (Fig. 15). Of the four contributing sub-indexes only employment made a positive contribution, while sales, orders and inventories was flat (-0.01, 3MMA). Personal consumption and housing has been trending higher since 2011 but remains below the line, (Fig. 16). Weaker than expected economic performance during Q1 has kept the FED from raising interest rates causing the trade-weighted dollar to slide 5% since its recent January high. This change is helping exporters get back on track. In addition energy prices have gained ground from multi-year lows which should kick-start investment in this arena if the advance continues. Furthermore, the ISM index posted a healthy 51.8 in March indicated a turn-a-round in the making for manufacturing. This coupled with the underlying strength in the job-market gives reason for optimism heading into Q2 and Q3.

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Steel Demand Indicators: Table 3 is a snapshot of the market situation on 4/21/2016. Indicators updated since we last published two weeks ago are shaded beige. In most cases this is not March / April data but data that was released in the last four weeks, the actual month to which the data relates is shown in the second column. Of the 26 indicators under consideration, for the present situation, 5 are positive by historical standards, 10 are negative and 11 are neutral. This was no change from our last update on April 7th.

In our trends analysis, most of the values reported are three month moving averages to avoid the knee jerk reactions that are characteristic of most economic reports in the press. Please note that there is nothing subjective about this trends analysis. The numbers presented here are the facts available as of April 21st 2016. The number of indicators trending positive in this latest analysis was 16 with 9 trending negative and one unchanged. Overall this was also no change from April 7th either in the total or in the detail.

At the end of each month we analyze the trend of the trends to see if the number trending positive is improving or deteriorating. We are now out of the slump which began in October and continued through January, followed by a small increase in February and a larger improvement in March that has been sustained in April.

We have separated the leading indicators from the main table for a closer look, these are shown in Table 4. Of the twelve leading indicators eight are trending positive, three negative and one unchanged. This was no change from our April 7th update. In summary the present situation is historically weak but trends are good particularly for the indicators that we consider to be leading. (Explanation of Indicators).

Table 3

Contributors this week include; Laura Remington, Peter Wright and Steve Murphy