Weekly Market Update - January 22, 2015

Architectural Billings Index: The December national ABI came in at 52.2, up 1.3 points from November’s reading, while the 3 month moving average was 52.3, 4.6% higher than the same timeframe one year ago. Regionally the South posted the highest score at 56.8, followed by the West at 52.9, and the Midwest at 50.8. The Northeast recorded an ABI of 45.8 reflecting deteriorating billings. (Recall that > 50 equates to expanding billings, <50 = declining billings), (Fig.1). Referencing comments from AIA Chief Economist Kermit Baker, Hon. AIA, PhD: “Particularly encouraging is the continued solid upturn in design activity at institutional firms, since public sector facilities were the last nonresidential building project type to recover from the downturn.”

In Fig 2, we take a long view of the national ABI to get a sense of where we are in the construction cycle compared to the previous expansion. On the left hand axis the ABI is shown as average of the previous 12 months (smoothing volatility), the right hand axis presents the 12 month y/y change in percentage terms. The slope of line “A” between 2004 and 2006 offers a reference “growth rate” where demand for design services is growing rapidly from which to benchmark. In the period marked “B” billings continue to increase but plateau. In period “C”, 2008 billings continue to increase but at a decreasing pace until the economic crash began in mid-2008. In period “D”, billings fall at an accelerating pace, bottoming towards the end of 2009. In period “E” and “F” billings do not expand (remain <50), but the worst is over. In 2013, period “G”, billings expand at the same rate as in period “A” and it looks like a sustained acceleration in demand for design services is underway. In Q3-2013, period “H”, billings continue to expand but the acceleration stalls before rebounding in period “I” where acceleration in demand rebounds once again. Using the 12 month average technique, billings declined for 54 consecutive months from May 2008 through October 2012. Since then, the ABI has exceeded the 50 threshold for 25 months in a row.

Fig 1 

Producer Price Index (BLS): The PPI of all commodities (December 2014), has been falling since the middle of 2014 and is down 0.5% y/y, (Fig. 3). There are hundreds of commodities that are rolled up into this summary chart. Declines in oil prices, agricultural produce, and non-ferrous metals among other commodities have raised the fear of disinflation in recent months. Materials and components used in non-residential construction have also fallen and are collectively off 1.9% y/y, (Fig. 4). Table 1 presents a PPI comparison of construction steels and its competing materials over 3, 6, 12 and 24 month time spans. All material and components of construction (includes residential) are up 2.3% y/y but are flat with prices 3 months ago. Hot rolled structural shapes are 2% lower than 6 months ago and 0.9% lower than they were two years ago, but are 4.7% higher than they were one year ago. Fabricated structural steel for non-residential buildings is also trending downwards, most recently falling 0.2% over the past 3 months. Reinforcing bars, (now rolled in with joists) were up 2.9% y/y, but have declined 0.1% over the last 3 months. Softwood lumber has also posting declines, off 4.6% over the past six months indicating a weakening residential construction market. Ready mixed concrete and asphalt bucked the trend, up 2.4% and 2.9% over the past 6 months.

To establish whether or not the government PPI data is an accurate “real world” indicator we at Gerdau like to do a reality check. In Fig. 5 the PPI for hot rolled structural shapes is presented on the left axis while the spot price of beams is shown on the right axis. The relationship is very goods and proves that the Bureau of Labor Statistics data is indeed an accurate reflection of the real world. Table 2 reflects the PPI on structures. Overall non-residential construction PPI is down in each of the comparison timeframes and off 3.8% over the past 3 months. Commercial structures are also recording declining prices (-2.3% over 3 months), while warehouses, offices and industrial structures all posted rising prices.

Fig 3 

U.S. Service Center Report, (MSCI): Service centers shipments of all carbon steel products rose 3.8%, 3MMA y/y to an average of 151,900 tons/shipping day for the three month period ending December. All product groups recorded increases, led by an 8.3% increase in plate and a 7.8% jump in structurals, (Table 3). Inventory levels surged by 18.6% across the board to an average of 2.80, 3MMA months on hand (MoH). Plate posted the largest increase, up 25.5%, 3MMA y/y, followed closely by sheet, up 24.2%. Pipe and tube and bar and shapes inventories reported declines of -6.5% and -1.8% respectively, (3MMA y/y). Daily intake moved up 5.8%, 3MMA, y/y overall to 159,500,000 tons with plate surging 9.6%%, and sheet up 7.1%. Bar and shapes was the only product group to report a decline, down 5.0% 3MMA, y/y.

Table 3

Canadian Service Center Report, (MSCI): Service centers shipments of all carbon steel products fell 0.6%, 3MMA y/y to an average of 21,000 tons/shipping day for the three month period ending December. Three product groups recorded increases, led by a 6.7% increase for bar and shapes. Pipe and tube shipments were off 1.4%, while sheet declined by 3.6%. Inventory levels across the board increased sharply, up 21.9% led by sheet which surged 31.0%, structurals, +14.2%, and plate +12.9% (3 MMA y/y), MoH stood at 3.66 ending December, up from November’s 3.20. Daily intake increased by 4.8% for all product groups led by an 11.8% jump in bar and shapes and a 10.4% rise in plate. Pipe and tube intake fell 9.2% as did structurals, off 3.7%, (Table 4).

Table 4

Employment Update: Net job creation for December totaled 252,000, the eleventh consecutive month of job growth above 200,000. Net job creation for November and October were revised upward from 321,000 to 353,000 and 243,000 to 261,000, respectively. This was 50,000 more jobs than reported in the original release, (Fig. 6). The U-3 unemployment rate dropped once again to 5.6%. This is the lowest the rate has been since Q2 2008. Labor force fell to 62.7, down from last month’s figure of 62.9. This rate has been below 63.0 since February 2014 and is still among the lowest on record. The employment to population ratio remained at 59.2 for the third straight month.

The U-6 unemployment figure, which includes those persons who are marginally attached to the labor force, fell to 11.2% in December, from 11.4%. This number has been steadily declining since the end of 2010. It has declined 1.5% for 2014. The U-6 rate peaked at 17.4% in October 2009. The long term unemployed, those unemployed for 27+ weeks, have increased to 31.9% of overall unemployed. Despite the big increase in net job creation, this figure has remained flat for most of the second half of 2014. The number of unemployed has fallen more than one million persons in 2014.

Net job creation has averaged 246,000 jobs in 2014, however, inflation has been mainly subdued, currently at 0.8% in December, staying below the 2.0% mandate by the Fed Reserve. JOLTS data, which entails job openings, separations, and quits, revealed some enlightening news. The number of job quits increased in 2014 to 2.8 million. This is an indication of a healthier job market as more employees are braving the job market and voluntarily leaving positions they normally would’ve kept during a recession.

The long term unemployed (six months or longer) and involuntary part time workers have decreased only slightly and wage growth has stagnated, under 2% y/y, since the end of the recession leading to a considerable amount of slack in the labor market. Still, Janet Yellen, the Fed Chairwoman, has continued to mentioned, in the short term, interest rates will not be raised from its current six year position of near zero.

Fig 6

Industrial Production: The Industrial Production Index measures the monthly output from four industries: mining, manufacturing, gas, and electric. Its baseline is 2002 = 100. The seasonally adjusted figure in December was 106.5114, down slightly from November but among the highest on record dating back to 1993. The index rose 4.9% y/y and has been above the baseline for 16 consecutive months. The three month moving average was 106.13, the highest figure on record. December’s reading is up 27.5% since June, 2009, the lowest measure and last month during the Great Recession.

As industrial production has recovered and seeing all-time highs, total steel supply has started to make a comeback from the depths of the recession since the second quarter of 2014 and started to experience monthly averages that were prevalent before the onset of the crisis. October’s total steel supply was 10.4 million, the highest value since May 2007. As the construction and manufacturing industries continue to expand throughout the end of the year, total steel supply will more than likely follow suit. Historically there has been a 70% correlation between the two data sets, (Fig. 7).

Fig 7

European Update: Fig. 8 shows the decline of the Euro vs the U.S. $ through yesterday when the Euro was down to 1.1582 U.S. dollars. Financial markets are experiencing heightened volatility driven by concerns about slowing and uneven global economic growth. Europe is one of the most problematic areas. The next European Central Bank (ECB) policy meeting takes place today, January 22nd, the expectation is that the ECB will be the last major entrant into the quantitative easing (QE) game. The plan is to spur economic activity by increasing the amount of money available. It calls for governments to increase their borrowing for various growth oriented projects to decrease unemployment. Rather than selling the bonds on the open market, a move that would trigger a rise in interest rates, the bonds are sold to the central banks of Eurozone member states, which have the ability to print new money. The money is then sent to the treasury. With more money flowing through the system, the possibility of recession driven by a lack of capital will be relieved. This is why the measure is called quantitative easing. However the European strategy is different from that pursued by the U.S. Federal Reserve. The European Central Bank will print money, but each Eurozone country's individual national bank will do the purchasing, and each will be allowed only to buy the debt of its own government. The individual countries don’t want to cover each other's shortfalls. In particular, Berlin does not want to be in a position where a series of defaults could cripple Europe as a whole and therefore cripple Germany. This is why the country has resisted quantitative easing, even in the face of depressions in Southern Europe, recessions elsewhere and contractions in demand for German products. Berlin preferred those outcomes to the risk of becoming liable for the defaults of other countries. Angela Merkel is responsible for the fate of Germany, not Europe, she also needs a viable free trade zone in Europe because Germany exports more than 50 percent of its gross domestic product. The country cannot stand to lose free access to Europe's markets because of plunging demand, but it will not underwrite Europe's debt, if the plan as envisaged occurs it will be every country for itself. The structure of the plan will rest on the structure of the European experiment. California and New York share a common fate as part of the United States. While Germany and Greece are both part of the European Union, they will not share a common fate until there is a complete political and fiscal union. Such a union is not likely because of centuries of history of national identity. Greece is holding early parliamentary elections on January 25th. A victory for the anti-austerity Syriza party will probably trigger tense negotiations with the country’s official lenders and fresh volatility in Greek government bond markets. But the expected launch of ECB QE should mitigate contagion to the rest of the periphery.

Fig 8

Housing Starts, Permits through December 2014: Starts in December rose to an annual rate 1,089,000 from 1,043,000 in November. The three month moving average, (3MMA) rose to 1,075,000, (Fig. 9). This was the fourth consecutive month that the 3MMA of starts exceeded a million units. The year / year growth rate of the 3MMA of total starts in December was 4.8%. The growth rate by this measure is down sharply from 16.7% in September. Note this is not seasonal as we are considering year over year relationships. Total starts are still on track to reach 1.6 million by the end of 2018. Multifamily starts are now beyond the pre-recession high of January 2006 but single family are still 60.1% below the level enjoyed at that time. The decline in the growth rate of total starts is entirely reflective of the multifamily sector the growth of which has declined from 35.9% in August to 0.6% in December. 3MMA year over year. Single family growth by the same measure has ranged erratically between 4.0% and 12.1%, (Fig. 10).

Permit data is useful to evaluate where future starts are headed. If permits exceed starts then we anticipate an acceleration and vice versa. Table 5 shows that total permits were 16,000 less than starts in December on a 3MMA basis. However the situation continues to be dramatically different for single and multi-family units. Single family permits were 57,000 less than starts and multi-family permits were 41,000 more than starts. This signals that the recent decline in multifamily starts is likely to be short lived and that the improvement in single family doesn’t have legs.

Fig 9

Steel Demand Indicators: Table 6 is a snapshot of the market situation on 1/22/2015. Of the twenty seven indicators under consideration, the present situation of twelve are now positive by historical standards, eight are negative and seven are neutral. There was no change either in the total or in the detail from when we last published two weeks ago. 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 latest facts available as of today’s date. Overall there was an increase in positive trends of two and a decrease of one unchanged, (Chicago shredded) and a decrease of one in the negative category. The count now stands at 20 positive and 7 negative. There were two changes in the detail in the last two weeks. Chicago shredded which had been unchanged in December increased by $9 to $334 / gross ton and net imports which had been trending negative declined in the month of November therefore reversing the trend and becoming positive. There were no changes in the direction of the trends data for the general economy, construction and manufacturing. The employment data that was released in early January for December advanced satisfactorily in total and for both construction and manufacturing. Scrap exports continued to decline and in November YTD were down 15.7% from this time last year. Service center daily shipments of long products were lack luster but still up by 4.3% y/y. Housing starts in December continued their slow recovery and were up by 4.9% y/y. The decline in the PPI of commodities accelerated, we regard this as a leading indicator of industrial construction. The latest month or quarter for which data is included is identified in the 2nd column. Indicators updated since last published are shaded beige. (Explanation of Indicators).

Table 6

Contributors this week include; Bryan Drozdowski, Peter Wright and Steve Murphy