Weekly Market Update - December 1, 2016

Construction Put-in-Place (CPIP): Data released by the US Census Bureau on December 1st reported that spending fell 0.9% month over month, as CPIP is based on construction spending work as it occurs. Table 1 displays non-seasonally adjusted expenditures by sector on a 3MMA and a 12MMA year over year basis to eliminate seasonality or volatility that occurs month to month. We consider four sectors within total construction, non-residential, residential, infrastructure and other; which includes industrial, utilities and power. In the last 3 months non-seasonally adjusted construction spending totaled $327.4 Bn and rose 2.6% y/y. In the 12 months through October 2016 construction spending totaled $1,172.3 Bn, an increase of 7.5% y/y compared to the same time frame ending October 2015. However momentum (3 month subtract 12 month) was negative, signaling that construction activity is slowing. This is also supported on Figure 1 as the 3 month y/y percent change, albeit still on the positive side, continues to diminish.

Reviewing the breakdown of expenditures, the growth rate of private construction rose 5.9% in the last three months, while public construction spending fell, with state and local construction down 5.0%, 3 months y/y and federal down 1.7%, 3 months y/y. Spending for highways, streets and transportation was depressed, down 2.8% and 12.9% 3 months y/y respectively, while spending on vital infrastructure projects such as water supply, power and sewage/waste continue to plummet. Momentum was negative across the board.

Table 2 drills down into detail within Non-residential CPIP. Three month expenditures totaled $152.2 Bn, up 6.9%, 3 months y/y and were $550.9 Bn over 12 months, +9.5% y/y. Overall momentum was down 2.6% and declined for all but three project groups (Education, Commercial and Office). Office construction is surging, rising 25.3% y/y and reaching its highest outlay ever, (Figure 2). Strong past employment gains and the expectation of a further 2 million jobs created in 2017 (per PCA), is driving demand for more office space. Lodging is almost expanding rapidly (+28.2% y/y), as confident consumers travel more.

Table 1

Figure 1

Non-Residential Starts (Dodge Analytics): October non-residential construction (NRC) starts measured in square-feet increased 5.6%, 3 months total year, its second month in a row with positive numbers after five months of negative postings. Twelve month y/y growth remains in the red, -4.3%, (Figure 3, Table 3). Apartments (>4 stories) recorded its first gain (+3.4%) 3 months y/y after five months of consecutive y/y declines. On a 12 month y/y basis apartment starts recorded a slight decline of -0.6%. Apartments accounted for 303 million square feet out of a total of 1,239 million started over the past 12 months or 24.5%. We include apartments >4 stories in non-residential since they can be framed with structural steel or reinforced concrete.

Project groups under roof with negative growth 3 months y/y include: Manufacturing plants (-36.9%), Transportation (-54.4%), Religious buildings (-22.6%), Educational (-6.2%) and Retail (-24.4%). Projects types recording positive growth 3 months y/y include: Offices and banks starts surged 75.5%, 3 months y/y, the third month in a row of positive growth after 15 months of negative postings, (Figure 4). Medical (+24.8%), Warehousing (+11.7%), Parking Garages (+14.1%), Hotel & Motel (+15.1%), Civic (+31.5%), Food & beverage (+14.2%) and Recreation (+5.8%). In an encouraging sign, overall momentum came-in at 9.9% in October, its second consecutive month with a positive reading after four months of declining values.

Table 4 presents NCR expenditures for infrastructure project starts, (not under-roof). For the 12 months ending October the total was $816.5 Bn down 10.5% y/y. On a 3 month y/y basis, expenditure surged 18.3% to $194.1 Bn after recording 12 consecutive declines. The large increase on a 3 month y/y basis compared to the negative 12 month number resulted in a strong momentum value of +28.8%. All project categories recorded positive growth on the 3 month y/y basis except Power and other plants. Conversely all but two project categories recorded negative growth on a 12 month y/y comparison except “other” infrastructure and Power transmission.

Figure 3

Table 3

U.S. Industrial Construction Starts: October starts posted $25.4 Bn, up 32.3% compared to the $19.2 Bn in October 2015. On a 3 month year on year basis starts rose 2.1%, pushing momentum to a positive 17.5%. In total of the 12 project categories, 7 recorded growth on a 3 month year on year (y/y) basis, the same ratio were up on a 12 month y/y basis. Power projects declined 62% 3 months y/y, and were down 10.6% on a 12 month y/y metric. Industrial manufacturing starts were strong, up 32.5% 3m y/y, and up 27.8% 12m y/y. Production oil & gas starts rocketed 173.8%, 3 months y/y, yet were down 85.1% 12 month y/y. Oil prices have recovered to the low fifties (WTI wclosed at $50.80 on 12/01/2016), (Table 5, Figure 5).

Figure 6 illustrates US industrial starts by consensus region showing the y/y change in percent change as well as the 12 month expenditure. The nation as a whole saw industrial starts fall by 15.4% y/y. However, when looked at on a regional comparison, there was tremendous volatility. Regions recording declining construction starts include; The Southwest (-55.8%), West North Central (-12.8%), and the Mid-Atlantic (-21.6%). Regions posting y/y growth for the 12 months ending October include; New England (+165%), the Northeast (+35.7%), East North Central (+28.7%), the West Coast (+25.6%), Southeast (+7.8%), and the Mountain regions (+4.0%).

Table 5

Canadian Industrial Construction Starts fell 42.3%, 3 months y/y and were off 26.7% compared to the 12 months through October 2015. Energy related projects such as transmission of oil and gas, and alternative fuel projects, fell, while industrial manufacturing, pharmaceutical& Biotech and Chemical processing starts each recorded sharp gains 3 months y/y, (Table 6).

On a regional assessment, industrial construction in the Atlantic region weakened, while Quebec and the Western region of Canada showed positive growth on a 12 month y/y comparison. Increased starts for Power, Industrial Manufacturing and Oil & gas transmission drove the 12 month y/y growth in Western Canada, (Figure 7).

Table 6

ISM Manufacturing Index: The Institute for Supply Management’s manufacturing index for November rose to 53.2, up 1.3 points m/m, beating analyst expectations. On a 3MMA basis the index increased 1.27 points to 52.20, (Figure 8). There was a 0.9 point gain in new orders to score a value of 53.0, a three month rally after the index fell below the 50 threshold (>50 = expansion, < 50 = contraction) in August. The employment sub-index recorded its second consecutive monthly score above 50 after three months below that mark indicating that employers are expanding payrolls. The production sub-index also performed well hitting 56.0 in November, up 1.4 points m/m, consistent with strong growth in industrial production.

The difference between new orders and inventories, which is considered a proxy for future production broadened by 4.0 points in November. This indicates that we can expect to see increased production levels going into 2017. Manufacturing conditions should continue to improve, as  inventory levels are more favorable, energy prices are trending higher, and domestic demand is holding up well. Of concern is the appreciating U.S. dollar which will provide major headwinds for exporters going forward as will policy concerns. According to Moody’s, history has shown that increased policy concerns (Trump administrations trade and immigration policies, import tariffs etc.), can dampen factory production. Despite these concerns, November's report was encouraging for the immediate future for US manufacturing.

Figure 8

Automotive Production in NAFTA October 2016: Total light vehicle, (LV) production in NAFTA in October was at an annual rate, of 18.994 million units, up from 18.393 million in September. Based on historical data we can expect November and December’s production to decline quite sharply.

On a rolling 12 months basis y/y through October, LV production in NAFTA increased by 2.9% which was down from a 3.0% growth in 12 months through September. There has been a very gradual slowdown in growth for the last three years as indicated by the green bars in Figure 9, however production has been above the previous peak every month in 2016. On a rolling 12 months basis y/y the US was up by 2.0% with positive momentum, Canada was up by 6.7% with negative momentum and Mexico was up by 1.5% with positive momentum, (Table 7). The four months July through October were the first months for Mexico to have positive momentum after fourteen straight months of slowdown. Canada experienced negative momentum in July through October following very strong momentum in the previous six months. On a rolling 3 months basis, Mexico has gained production share this year mainly at the expense of Canada, (Figure 10). In October on a rolling three month basis, the US production share of total light vehicles was 67.7% which was better than the average of 67.4% for the year as a whole. Canada’s was 12.8% which was less than the monthly average of 13.5% for the year. Mexico’s was 19.6% which was up from 19.1% for the first 10 months of the year. Production in Mexico in 2014 was 3.2 million units, in 2015 was 3.4 million units and through October annualized was 3.464 million units. The Mexican production target for 2020 is 5.0 million units according to Eduardo Solis, president of the Mexican Automotive Industry Association.

Ward’s Automotive reported that total light vehicle inventories in the US were 73 days at the end of October, up from 65 in September and up from 69 days in October last year. Month over month FCA (Fiat Chrysler Automotive) was up by 11 days to 84, GM was up by 5 also to 84 and Ford was up by 10 to 89 days.

Figure 9

Table 7

Consumer Confidence: The Conference Board Consumer Confidence Composite index rose 6.3 points in November bounding to 107.1, the highest reading since July 2007. The Present Situation sub-index also reached its highest level since August 2007, noted by the blue line on Figure 11. The number of consumers surveyed that felt business conditions were “good” rose, while the number who believed business conditions were “bad” fell.

The Expectations sub-index topped 91.7 reflecting consumers optimistic short-term outlook. US Consumers’ view of the labor market was mixed. Those expecting more jobs was flat, while those who anticipated fewer jobs in the coming months fell 2.8 points, (Figure 12). Likewise, those surveyed who expected incomes to rise was flat, while consumers who expect a drop in incomes waned slightly, down 1.2 points.

Lynn Franco, the Director of Economic Indicators at the Conference Board was quoted on November 29 as saying, “A more favorable assessment of current conditions coupled with a more optimistic short-term outlook helped boost confidence. And while the majority of consumers were surveyed before the presidential election, it appears from the small sample of post-election responses that consumers’ optimism was not impacted by the outcome. With the holiday season upon us, a more confident consumer should be welcome news for retailers.”

Improved confidence will help drive holiday spending, and should give a positive boost to Q4 GDP. The blue line on Figure 13 shows the Federal Reserve G19 consumer credit outstanding data for revolving credit lines, such as credit cards. It has not increased nearly as much as the red line which represents installment loans like mortgages, motor vehicle, and student loans. Revolving credit balances rose seven consecutive months ending with a balance of $979 million dollars in September, a level not seen since May 2009. Installment loans also continue to rise as consumers make larger purchases. This is supporting evidence of improved US consumers’ confidence, as Americans are more willing to spend.

Figure 11

Figure 12

Steel Demand Indicators: Table 8 is a snapshot of the market situation on 12/1/2016. Indicators updated since we last published four weeks ago are shaded beige. In most cases this is not November data but data that was released in November month for previous months, the actual month to which the data relates is shown in the second column. Of the 27 indicators under consideration, the present situation of 6 are positive by historical standards, 12 are negative and 9 are neutral. There was a net increase of one negative and a decrease of one neutral since our last update on November 17th. Our intent in using the word neutral is to say that this indicator is considered to be in the mid-range of historical data. The change that occurred in the last two weeks was that the Chicago Fed National Activity index fell below negative 0.2 and we re-classified it from neutral to negative. There were no other changes in our perception of the present situation.

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 December 1st 2016. The number of indicators trending positive in this latest analysis was 11 with 16 trending negative. This was a net increase of one positive since November 17th. The change that occurred was in housing starts which on a 3MMA basis year over year had positive growth in October. There were no trend changes in any of the other sectors that we summarize here.

We have separated the leading indicators from the main table for a closer look, these are shown in Table 9. Of the twelve leading indicators five are trending positive, and seven negative. This was a move of one from negative to positive since our last update and was the result for housing starts as described above. We regard this indicator as leading for two reasons. These are that starts are a measure of future materials consumption and housing pulls other sectors such as non-residential construction and infrastructure along with it.

In summary the present situation is historically weak and deteriorated slightly in this update. Trends weakened in the seven months prior to November. At the end of October only 33.3% of indicators were trending positive. In this latest data through the end of November 40.7% were trending positive.
(Explanation of Indicators).

Table 8

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