Weekly Market Update January 31, 2014

Non-Residential Construction Forecast: Each January the American Institute of Architects (AIA) canvases several institutions that forecast non-residential construction (NRC) activity in the U.S. The AIA then computes an average from the combined inputs. The data is not inflation adjusted. The process is repeated mid-year. Table 1 presents the consensus forecast and all of the panelist’s individual forecasts. Here is recent a quote from Kermit Baker, AIA Chief Economist:

After a Year of Moving Sideways, Nonresidential Building Activity Poised to Resume Recovery in 2014. With a federal budget framework in place and the economy shedding its life preserver, pent-up demand for new facilities is expected to produce extended period of construction gains."

Nonresidential building activity had a disappointing performance in 2013, with spending levels largely unchanged from those of 2012. However, 2014 looks to be a better year, with building activity increasing 5.8 percent overall, including a double-digit gain for commercial facilities. The recovery will continue into 2015, with spending increasing 8 percent overall and 6 percent for institutional buildings. These are some of the key findings from the AIA’s Consensus Construction Forecast, conducted in December 2013. Semiannually, the AIA compiles results from the leading national construction forecasters to develop its consensus. The forecasters lowered their outlook for 2014 from the 2013 midyear update, which had projected 7.6 percent growth for the coming year. However, disruptions in the economy in the second half of the year stalled the construction recovery, modestly pushing back growth rates.

The consensus forecast for growth in NRC in 2014 is +5.8%, the variation between the respective forecasters ranges from +4.3% (Wells Fargo), to +9.2% (IHS Global). The forecasters are bullish on Commercial construction, the consensus forecast is +10.3% with a range of +4.8% (FMI) to +15.9% (McGraw Hill). The range of estimates for Industrial construction ranges from +4.0% (Associated Builders & Contractors) to +15.5% (Moody’s). The consensus forecast for this sector is +7.8%. The forecast for the Institutional sector are more pessimistic, ranging from a low -2.0% (McGraw Hill) to +7.3% (Moody’s), with a consensus target of 3.4%. The sub-categories have a range of 9 to 11 points, while the overall NRC outlook is a much tighter 5 point range. As a point of reference, Table 2 presents the NRC forecast from the same organizations made in 2012 for 2013. You may draw your own conclusions as to which firm(s) are the best forecasters.

Table 1







Table 2

Industrial Construction: For the year (2013), spending was down 10.9% y/y, but this was after an extraordinary 2012 that included the start of two nuclear reactors facilities, (Fig.1). The dashed red line (parallel with historic recovery rates), maps the trajectory from the start of the recovery phase, illustrating how much 2012 was over the trend. The shaded area for 2014 presents “confirmed starts” per Industrial Information Resources. At this early point in the year, the rate is already approaching the red dashed trajectory line, an early indication that 2014 should post solid y/y growth. For the past three months compared to the same period last year, industrial spending was up 5.4%, (Table 3). Power projects are once again the big driver, up 36.9%, 3 months y/y accounting for 32% of the total spend. The second largest category, industrial manufacturing was off 5.7% for 3 months y/y and down 1.8% y/y, so it appears to be slowing down after a strong run over the past several years. Table 4 presents the distribution of spending throughout the nine census regions of the US. The Southwest region represents 39% of the total spend 3 months y/y, an acceleration from the 32% share over the past 12 months. Power and energy projects are looking very strong in this region with pronounced strength along the Gulf Coast. Elsewhere in the country many regions are cooling off with momentum down in all regions except the Southeast and the Mid-Atlantic. The Midwest (second highest spend) was basically flat.

Fig 1

Global Scrap Trade for the third quarter 2013, totaled 20.3 million tons (MT), bringing the year to date (YTD) total to 65.5 MT for the year. The U.S. and Europe, continue to be the largest scrap providers to the world. The major importers are located in Southeast Asia & Turkey. Fig. 2 illustrates the global scrap trade YTD through the third quarter 2013. Regions with red font values are importers, while region with blue font are exporters. Third quarter global trade was down 11% q/q, YTD totals were off 11.5%. Conversely U.S. scrap exports increased 1.9%. YTD the U.S. exported 14.67 million tons, 22% of the worlds exported scrap. U.S. exports have fallen 15% y/y compared to 17 MT exported in the first 3 quarters of 2012, (Fig. 3). The U.S.’s largest scrap customer, Turkey is also the world’s largest importer of scrap, increasing third quarter scrap imports almost 20%, for a total of 13.2 MT YTD. On a YTD basis, Turkey’s imports have waned 17% as have South Korean (-15%) and Chinese (-11%), (Fig. 4). As you have probably read in the media, Turkey (amongst other emerging nations) has seen its currency depreciate sharply in recent weeks, (Table 5). As a result, Turkey has reduced its imports of scrap from the U.S. With this scenario likely to continue, (to include other nations with devalued currencies), the resultant lower export demand for U.S scrap should ease the recent upward pressure on U.S. scrap pricing.

Fig 2

Regional employment growth through Q4 2013: The individual states compile their own employment numbers independently of the Bureau of Labor Statistics so the two sources are a useful reality check. In 2013 the Feds had employment growth at 2.186 million and the States at 1.916 million so numbers are comparable. Based on the state data, the Pacific region, (California, Oregon and Washington) created the most jobs in 2013 with an additional 329,500. The South Central, (Texas, Louisiana, Arkansas and Oklahoma) came in second with 302,400. Table 6 shows net job creation by region and calendar quarter. The recovery in employment has been very varied across the country since the recession. Only the South Central and the North Central (Iowa, Kansas, Minnesota, Missouri, Nebraska, N and S Dakota) regions have exceeded the total pre-recession number, (Table 7). Comparing job creation by region since the low point of the recession which was Q4 2009, the South Central has created the most jobs with an additional 1,307,000. The recovery in jobs has ranged from 4.0% in the North East to 8.9% in the South Central region.

Table 6

Industrial Production: The Global Industrial Production Index measures the monthly output from four industries: mining, manufacturing, gas, and electric. Its baseline is 2002 = 100. The seasonally adjusted figure reached an all-time high in December of 101.7636, (Fig. 5). The Index rose 3.7% on a y/y basis in December and has now increased for sixth consecutive months. The three month moving average is 101.21, the highest figure on record. December’s reading is up 21.8% since June 2009, which was its lowpoint during the Great Recession. As industrial production has recovered and seeing all-time highs, total steel supply has yet to make a comeback from the depths of the recession and is still well below the monthly averages seen before the recession. It is probable that as the construction and manufacturing industries continue to expand throughout 2014, total steel supply will follow suit. Historically there has been a 70% correlation between the two data sets.

Fig 5 

Consumer Confidence: The Consumer Confidence Index increased for the fourth straight month in January, reporting in at 80.7 from December’s revised figure of 77.50, (Fig. 6). The index is up 38.1% on a y/y basis. The Present Situation sub-index also rose in January to 76.7 from 74.0 and is up 40.7% on a y/y basis, as well. The sub-index yielded the highest figure since April 2008. The Expectations sub-index also increased in January to 81.8 from 79.0, and is up 36.6% on a y/y basis, but has yet to recover from June’s three year high of 91.1. Labor market conditions were mixed as income based responses were positive, however job market responses were slightly negative. The percentage of consumers who expected a rise in income increased and those who anticipate lower income decreased. Consumers expected fewer jobs in the coming months.

Fig 6

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