Weekly Market Update - July 14, 2016

Industrial Construction Starts were down 20.3%, to $193.1 Bn (12 month rolling total), compared to June 2015. On a 3 month y/y basis starts declined a smaller 17.2%, subsequently momentum was a positive 3.1%. Power projects declined 23.0%, 3 months y/y but were up 8.8% on a 12 month y/y metric. Production oil & gas starts plummeted by 81.5%, 3 months y/y and by 81.5% y/y as oil prices remained depressed, trading in the mid-$40 range.

Despite the sharp percentage y/y decline, expenditures are still high relative to historic values. As Figure 1 illustrates, industrial construction starts in 2016 are right on the long term trend line. Outlays in 2013 through 2014 were well above trend. A negative percentage in 2016 y/y results as the expenditure level falls back to the long term trend.

Three project categories surged by triple digits 3 months y/y to include: industrial manufacturing (+117%), Pulp, paper and wood (+135%) and petroleum refining (+216%), (Table 1). Of the 12 project categories, 7 posted growth 3 month y/y. In an encouraging sign that expenditures may be upswing, 10 of the 12 project categories posted positive momentum. Figure 2 illustrates industrial starts by census region showing the y/y change in percent as well as the 12 month total expenditure. Regions recording double digit declines include; The Southwest (-59.4%), New England (-43.0%), the Middle-Atlantic (-27.4%). Regions posting significant growth include; The Northeast (+60.2%), West North Central (+46.5%), Southeast (+32.1%) and the East North Central (+18.6%). The Mountain region y/y expenditures were off 7.6% and the Westcoast realized a slight increase (0.8%) y/y.

Figure 3 presents confirmed project starts through December 2016 on a 12 month basis, along with a 12 month y/y change. The Northeast (+102%) followed by the Westcoast (+39.3%), Middle Atlantic (+18.4%) and Southeast (+10.3%) are showing solid growth, while the nation’s mid-section is showing double digit declines. Low energy prices ARE no doubt disproportionally impacting this part of the country.

Figure 4 compares the twelve project categories 12 month totals through June for 2014, 2015 and 2016. Power, Industrial manufacturing, Pulp, paper & wood and Food & beverage are all running stronger in 2016 than in either 2014 or 2015. Metals and minerals, Chemical processing, Transmission (oil & gas), Production (oil & gas) and Alternative fuels are all down from previous years. The remaining categories show little change in expenditure terms y/y.

Canadian industrial starts were down 12.0%, 3 months y/y and off 24.5% compared to June 2015. Energy related projects were the principal reason for the large reduction with Production oil & gas down 42.9% y/y and petroleum refining down 95.0% y/y. Chemical processing, metals and mining and industrial manufacturing all posted large double digit declines, All regions of the country recorded negative growth y/y, however on a 3 month y/y metric, the Atlantic region and Quebec recorded strong growth, up 46.2% and117.3% respectively. Canada industrial construction starts witnessed robust growth, far above the long term trend line, (Figure 5) in the period between 2012 and 2014. Since the oil bust, expenditures have plummeted and are now well below the long term trend.

Figure 1

Figure 2

Table 1

Net Job Creation through June 2016: The increase in non-farm employment in June was 287,000 which followed a downwardly revised increase of 11,000 in May. This clearly is a case where a 3MMA is necessary to make any sense of the result. The 3MMA of gains through June was 147,000, up from 114,000 in May. Figure 6 shows the 3MMA of the number of jobs created as the brown bars and it is evident that there has been a decline during the course of this year. These numbers are seasonally adjusted by the BLS and our long term analysis makes us believe that the adjustment are less than perfect. Total nonfarm payrolls are now 5,810,000 more than they were at the pre-recession high of January 2008.

Table 2 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 2. In June, 265,000 jobs were created in the private sector and 22,000 in government. Since February 2010, the employment low point, private employers have added 14,799,000 jobs as government has shed 357,000. In June service industries expanded by 278,000 as goods producing industries gained 9,000 people. Since February 2010, service industries have added 12,438,000 and goods producing 2,004,000 positions. This is part of the reason for stagnant wage growth since service industries on average pay less than goods producing such as manufacturing.

The official unemployment rate, U3, calculated from a different survey, rose to 4.9% in June from 4.7% in May and back to where it was in February. This number doesn’t take into consideration those who have stopped looking. The more comprehensive U6 unemployment rate decreased from 11.3% in January 2015 to 9.7% in April and May this year then down to 9.6% in June, (Figure 7). 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 4.7%. The employment participation rate is widely quoted in the press as going nowhere. In June 2016 the rate was 62.7%, with a 3MMA also 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 June this measure stood at 59.6% with a 3MMA of 59.7% which was down from 59.8% in March through May. Figure 8 shows both measures on one graph.

In the 18 months since and including January 2015 there has been an increase of 3,652,000 full time and a decrease of 61,000 part time jobs. Figure 9 shows the rolling 12 month total change in both part time and full time employment. Frequently in the press we read that a large part of job creation is in part time employment which in some months is true but the part-time numbers are extremely volatile. To overcome the volatility we have to look at longer time periods than a month or even a quarter which is why we look at a rolling 12 months for this component of the employment picture.

Figure 6

Figure 7

Manufacturing and Construction Employment June 2016: Manufacturing has added 843,000 jobs and construction 1,143,000 jobs since the recessionary employment low point in February 2010, (Figure 10). Construction has leapt ahead of manufacturing as a job creator but the growth of construction productivity is very low, (or non-existent), in contrast to manufacturing where it is very high. The difference is the difficulty of automating construction jobs.

In June manufacturing gained 14,000 jobs but total manufacturing employment was 0.2% less than a year ago. In the first half of 2016, manufacturing has lost 24,000 jobs after gaining 8,000 in the second half of last year. Primary metals lost 12,000 in the 2nd half of 2015, lost 9,000 in the 1st half of this year and has had only one positive month out of the last eighteen. Table 2 shows that in June there were no positive results in the five manufacturing sectors that we examine. Note the subcomponents of both manufacturing and construction shown in Table 2 don’t add up to the total because we have only included those that have most relevance to the steel industry. A new report from the Manufacturers Alliance for Productivity and Innovation (MAPI; Arlington, VA) foundation indicates that despite the economic slowdown in the industrial sector over the past year, the incidence of actual and planned automation investment is very high in American manufacturing. The report is based on a national survey of U.S. manufacturers and non-U.S. manufacturers with a presence in this country. Eighty-three percent of respondents to the December 2015 national survey had automated some part of their manufacturing process in the five years prior to the survey and 76% indicating that they plan to do so in the three years following the survey.

There was no change in total construction employment month on month. April and May were the only months to have a contraction in construction employment since March last year. The construction data in particular conflicts with the positive construction expenditures report, (CPIP) issued by the Department of Commerce and which we reported on last week. The Associated General Contractors of America may have an explanation for this discrepancy and had this to say in their blog dated July 8th. Construction employment was unchanged from May to June, but an increase in hourly pay and longer workweeks, along with shrinking numbers of unemployed construction workers, suggest contractors would hire more workers if they were available. Association officials said the lack of available qualified workers for firms to hire appears to be holding back employment growth and urged Congress to pass legislation to reform and increase funding for career and technical education. Unemployment among construction workers is at a 16-year low, while average hourly earnings have accelerated for the past three months and average weekly hours are very high,” said Ken Simonson, the association's chief economist. “These indicators, along with reports from contractors, suggest there is a dearth of qualified workers to hire, not a deliberate pullback in hiring. Indeed, construction activity and employment should continue to outpace the overall economy in the remainder of 2016.”

Table 2

Figure 10

Rail Time Indicators Report (AAR) : Total US carloads excluding coal (coal was down 16.4% y/y), fell 2.3% m/m and was off 2.0% year to date (YTD) through June y/y. Metallic ores (primarily iron ore) plummeted 17.0% m/m and was off 19.1% YTD y/y. Primary metal products carloads fell 5.9% m/m and 6.2% YTD y/y, this makes fifteenth month in a row that the y/y volume has declined. Scrap carloads were off 5.3% m/m and 3.3% YTD y/y. Carloads of motor vehicles and parts improved by 0.8% m/m and by 4.9% YTD y/y. Total intermodal fell 5.6% m/m and was down 2.1% on a YTD y/y basis, (Figure 11).

Total Canadian carloads excluding coal (which was down 13.2% y/y), fell 10.6% m/m and was off 10.9% YTD y/y through June. Metallic ores (primarily iron ore), fell 13.2% m/m and tumbled 30.7% YTD y/y. Primary metal products carloads declined 16.6% m/m and 18.4% YTD y/y. Scrap carloads were virtually flat +0.2% m/m and +0.3% on a YTD y/y. Carloads of motor vehicles and parts improved by 3.8% m/m and by 9.7% YTD y/y. Total intermodal fell 6.4% m/m and were down 3.3% on a YTD y/y basis.

The reason we follow the AAR reports is because; freight railroading is a “derived demand” industry: demand for rail service occurs as a result of demand elsewhere in the economy for the products railroads haul. Thus, rail traffic is a useful gauge of broader economic activity, especially of the “tangible” economy.

Figure 11

Beige Book Summary: The Federal Reserve’s Beige Book latest report issued yesterday suggests that economic activity expanded modestly across most districts. Manufacturing was uneven across districts with most regions are reporting a rebound in activity since the previous report. Reporting on primary metal demand were mixed, while the energy sector remains challenged.

Labor market conditions nationally remained stable, as employment continues to rise and wage pressures remain modest to moderate. Wage pressure were moderate except for highly skilled and difficult to fill positions. The economic outlook remained generally positive, to include retail, manufacturing, and real estate. The consensus was that most expect growth to continue to be at a modest rate going forward. There was a degree of optimism on higher levels of consumer spending in the months to come.

Demand for non-residential property remained stable as interest in housing increased moderately while inventories remained low. Most expect to see continued home price increases and reported increased pressure on commercial property rents.

Nationwide, loan demand increased but varied considerably by region. Consumer lending was largely unchanged except for automobiles which recorded declining activity.

There was continued lackluster activity in the energy sector, but the outlook has improved. The challenge for these firms is to secure adequate credit facilities in an environment where loans are more difficult to obtain.

There was some concern expressed about the level of impact the US will experience as a result of the “Brexit” vote, where the United Kingdom decided to exit from the European Union.

In summary the Beige report indicates that the US economy is in good shape and will continue to grow albeit a modest pace.

Figure 11

Steel Demand Indicators: Table 3 is a snapshot of the market situation on 7/14/2016. 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 4 are positive by historical standards, 11 are negative and 12 are neutral. This was no change since we last published on June 30th.

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 July 14th 2016. The number of indicators trending positive in this latest analysis was 15 with 12 trending negative. Overall this was a decrease of two positive and an increase of two negative since June 30th. Changes that occurred were; net imports of long products which had decreased every month since August last year increased in May and the import price of rebar CIF Houston which increased dramatically in June fell back by $58 / short ton in July. There were no other trend changes in the last two weeks.

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 seven are trending positive, and five negative. This was no change since our June 30th update.

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 3

Contributors this week include; Peter Wright and Steve Murphy