Weekly Market Update - August 11, 2016

Net Job Creation by Industry through July: The July employment analysis by the Bureau of Labor Statistics reported that 255,000 jobs were created which far exceeded analysts’ expectations. May was revised up slightly from 11,000 to 24,000 and June was revised up from 287,000 to 292,000. The 3MMA in July was 190,000 which didn’t entirely wipe out the May aberration, but did make it look more credible. Figure 1 shows the blue bars as the 3MMA of the number of jobs created since 1990 and it is evident that there has been a decline in 2016. These numbers are seasonally adjusted by the BLS. Total nonfarm payrolls are now 6,083,000 more than they were at the pre-recession high of January 2008.

Table 1 slices total employment into service and goods producing industries and then into private and government employees. Total employment equals the sum of private and government employees. It also equals the sum of goods producing and service employees. Most of the goods producing employees work in manufacturing and construction and the major components of these two sectors are also shown in Table 1. In July, 217,000 jobs were created in the private sector and 38,000 in government. The Federal government gained 3,000 as state governments gained 5,000 and local governments gained 30,000. Since February 2010, the employment low point, private employers have added 15,015,000 jobs as government shed 300,000. In July service industries expanded by 239,000 as goods producing industries gained 16,000 people. Since February 2010, service industries have added 12,703,000 and goods producing 2,012,000 positions. This is part of the reason for stagnant wage growth since service industries on average pay less than goods producing industries, such as manufacturing.

In July manufacturing gained 9,000 jobs, but for the year as a whole was down by 15,000. On a positive note June and July were the first back to back months of manufacturing employment gains this year. In July total manufacturing employment was 0.3% less than a year ago but 1.0% higher than two years ago. Primary metals had positive job creation in July for the first time since June last year, but is down by 8,000 YTD 2016. Table 1 shows that in July all the sectors of manufacturing that we identify were positive except for oil and gas extraction.

Construction was reported to have added 14,000 jobs in July. April, May and June were the only months to have a contraction in construction employment since March last year. The construction employment data is not as positive as the construction expenditures report, (CPIP) issued by the Department of Commerce, which maybe (as the Associated General Contractors of America continue to report) due to a lack of availability of skilled workers which is being ameliorated by longer work weeks.

The official unemployment rate U3 was unchanged at 4.9% in July and up from 4.7% in May. This number doesn’t take into account those who have stopped looking. The more comprehensive U6 unemployment rate increased from 9.6% in June to 9.7% in July, (Figure 2). U6 includes workers working part time who desire full time work and people who want to work but are so discouraged that they have stopped looking. The differential between these rates was usually less than 4% before the recession but is still 4.8%. The employment participation rate is widely quoted in the press as going nowhere. In July 2016 the rate was 62.8%, with a 3MMA of 62.7% down from 62.9% in April. We’re not sure that we understand what this is a percentage “of” because of the multiple descriptions of the labor pool. Another measure is the number employed as a percentage of the population which we think is much more definitive. In July this measure stood at 59.7% with a 3MMA also of 59.7% which was down from 59.8% in March through May. Figure 3 shows both measures on one graph.

Figure 1

Table 1

Figure 2

Shipments and Supply of Long Products through June: This report compares domestic mill shipments and total supply to the market and quantifies market direction by product. Sources are the American Iron and Steel Institute and the Department of Commerce.

Table 2 shows both apparent supply and mill shipments of long products, (shipments includes exports) side by side as a three month average through June, for both 2015 and 2016, (y/y). Apparent supply is a proxy for market demand. Comparing these two time periods total supply to the market was down by 0.8% and shipments were down by 1.1%.

Apparent Supply is defined as domestic mill shipments to domestic locations plus imports. In the three months through June the average monthly supply of long products was 2.327 million tons, up by 3.1% from the period three months through March but down by 0.8% y/y. The short term improvement, (3 months) compared to the long term decline, (12 months) means that momentum is very positive. Table 3 shows the change in supply by product on this basis through June. Momentum was positive for all products.

Figure 4 shows the long term supply picture for the individual long products since January 2006 as three month moving averages. All products except hot rolled bars have trended up this year.

Mill Shipments, which includes exports, averaged 1.935 million tons / month in the three months through June, down by 1.1% y/y but up by 5.9% compared to three months through March, (3M / 3M). Table 4 shows shipments of individual long products. Shipments of all products except hot rolled bars improved 3M / 3M but only rebar and heavy structurals improved y/y. Figure 5 puts the results for the five main products into the long term context since January 2006. Shipments of heavy structurals and rebar have made progress this year but wire rod, hot rolled bars and bar sized shapes are range bound.

It is now well into August and the latest data we have for shipments and supply is for June. The AISI puts out weekly data for crude steel production the latest of which was w/e August 6th. This provides the most current data for steel mill activity. Weekly crude output had negative y/y growth from February 7th 2015 through February 20th 2016 on a four week moving average basis. In the next 19 weeks there was only one week with negative y/y growth, (Figure 6) but growth again became negative in the latest three weeks. This doesn’t jive with the results of our key market indicators analysis which are still trending mostly positive.

Table 2

Figure 4

Consumer Credit G19: The Federal Reserve release of current US consumer credit reported an increase of 0.4% during the month of June, an increase of $14.8 billion over May. Revolving credit balances, the majority of which was credit card debt, rose 0.9% m/m, while non-revolving credit such as mortgages, auto loans, and student loans, rose 0.2% in June, (Figure 7). Year over year revolving credit increased 5.6%, or $49.3 billion. The July 20th Federal Reserve release of the Senior Loan Officer’s Survey, banks reported increased demand for revolving credit such as credit cards, as interest rates remains low. A small fraction of banks also indicated easing lending standards for credit cards.

Month over month non-revolving credit for auto and student loans, (Figure 8) rose 2.1% and 0.6% respectively, and were up 7% and 6.6% y/y. In the loan officer survey regarding non-revolving credit, a small portion of banks reported increased demand for auto and other non-revolving loans, as students graduating from high school prepare to pay for summer and fall college terms. A modest portion of banks reported tightened standards for auto loans, while standards and loan requirements for other non-revolving loans remained unchanged.

Figure 7

ISM Manufacturing Index: The ISM manufacturing index (also known as the purchasing manager’s index), fell 0.6 points to 52.6 in July. The 3MMA (52.37 in July), has improved for six straight months. New orders came in at 56.9, flat with June. Figure 9 shows the progression of the 3MMA since January 1997 with the July value being slightly better than the long term average. A value of > 50 indicates expansion. Twelve industries reported growth in new orders including miscellaneous manufacturing. Five industries reported declines in new orders. The difference between new orders and inventories is considered to be a reasonable proxy for future production. This metric narrowed by 1.1 points in July to 7.4 yet still indicates increasing factory production this quarter. Customer inventories were unchanged at 51, which is considered to be excessive. Fabricated metal products and transportation equipment were among the six industries with high inventory levels while, primary metals was one of five with inventory levels considered to be too low.

Manufacturing is slowly improving, but not enough to make much of an impact on GDP. Moody’s expects manufacturing growth to continue in the “low single digits” throughout the balance of the year. Hurdles continue to be weakness in the global economy, economic uncertainty, and the strong US dollar.

ISM Non-manufacturing Index: The ISM non-manufacturing index recorded a score of 55.0 in July, down one point from last month. On a 3MMA the score was 55.5, unchanged m/m, (Figure 9). It is important to keep an eye on the non-manufacturing index since it accounts for 88% of GDP and therefore has a major impact on the demand for steel products. This month’s report showed mixed results but was generally positive as new orders moved up as did net exports. Fifteen of seventeen industries reported growth in business activity. Consumers continue to spend and show little evidence of weariness at this point. Thus far the Brexit effect on the US economy has been minor. Oil (and other commodity) prices will continue to be the wildcard going forward on the resultant strength of the US economy.

Figure 9

Portland Cement Shipments: Total cement shipments increased 5.7% month over month in May and were up 8.0% three months y/y resulting in positive momentum of 2.2%.

Figure 10 shows the three month total shipments along with the three month y/y change for the nine U.S. census regions. All nine regions posted positive y/y growth, led by 17.1% jump in the South Atlantic followed by a 15.5% surge in the New England region. The Pacific regions recorded the softest growth at +1.6%, 3 months y/y.

Figure 11 illustrates the census regions historic growth from 2004 to present. The two volume leading regions include the West South Central and the South Atlantic. The South Atlantic region has accelerated rapidly thus far in 2015 and 2016, while the West South Central has plateaued.

Figure 12 charts momentum from 2004 to present. Momentum was positive for six consecutive months after a string of 9 months of negative momentum. This is an encouraging sign for non-residential and infrastructure construction going forward.

Figure 10

Steel Demand Indicators: Table 5 is a snapshot of the market situation on 8/11/2016. Indicators updated since we last published two weeks ago are shaded beige. In most cases this is not July data but data that was released in July 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 5 are positive by historical standards, 11 are negative and 11 are neutral. This was an increase of one positive and a decrease of one neutral since our last update on July 27th. The change we made was to our view of the ISM Manufacturing Index which on a 3MMA basis exceeded 52.0 and therefore crossed the threshold that we consider historically positive.

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 August 11th 2016. The number of indicators trending positive in this latest analysis were 15 with 11 trending negative and one unchanged. This was a net decrease of one positive since our last update. The changes that occurred were as follows. The price of Chicago shredded declined in July which we regard as a negative and was unchanged in August. Infrastructure expenditures which had trended positive in the June data as reported in the CPIP analysis declined in July. This was the first decline since July 2013. There were no other changes in the direction of trends.

We have separated the leading indicators from the main table for a closer look, these are shown in Table 6. Of the twelve leading indicators eight are trending positive, and four negative. This was no change from our July 27th update. The ISM Manufacturing Index is a useful illustration of how this analysis works. This index, which we regard as leading, has trended positive since the beginning of March but it took until this report for the improvement to have accumulated to the point that we classified the present situation as positive.

In summary the present situation is historically weak but trends are good, which leads us to have confidence in the long products business environment through the 3rd quarter.
(Explanation of Indicators).

Table 5

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