Weekly Market Update - February 4, 2016

Construction Put-in-Place (US Census Bureau) : Total CPIP recorded growth of 10.8% for the year ending 2015, slowing a bit to +9.4% on a 3 months y/y basis. Private construction advanced 13.0% y/y and declining to 12.3% 3 months y/y. State & Local spending increased by 6.8% and 3.5% for the 3 and 12 month y/y comparisons. Single family residential continued to rise posting a 13.6% increase over 12 months falling slightly to a 13.0% performance on a 3 month y/y metric, (Table 1). Momentum was negative in every project category (3 month change subtract 12 month change), ranging from -0.6% for single family residential to -16.0% for conservation projects, indicating that construction sector is slowing.

Fig. 1 charts total construction expenditures from 2005 to present, (blue line) on the left axis and y/y change (bar graph) measured as a percent on the right axis. Total construction (NSA) for 2015 reached $950 Bn which is slightly ($4 Bn), more than the total realized in seven years earlier in 2008. As a reference the total construction market peaked in 2006 at $1,006 Bn.

Table 2 presents non-residential CPIP, which for the 12 months ending December, was up 17.1%, 12 months y/y, decelerating to 11.8%, 3 months y/y. Private expenditures totaled $343.4 billion, surging 21.1%, 12 months y/y, declining to 14.1% growth on a 3 month y/y comparison. State & Local spending recorded $123.4 billion over the year for 7.2% y/y growth, slowing to +5.3%, 3 months y/y. Every project category documented growth except for public safety which declined 5.5% y/y and 6.6%, 3 months y/y. The project sector with the largest growth in percentage terms was manufacturing, up 44.7% to $82.8 billion y/y slowing to +26.8%, 3 months y/y.

Fig. 2 charts non-residential building construction expenditures from 2005 to present, (blue line) on the left axis and y/y change (bar graph) measured as a percent on the right axis. Non-residential building construction (NSA) for 2015 reached $467 Bn which is slightly ($4 Bn), less than the total realized nine years earlier in 2006. As a reference the total construction market peaked in 2008 at $502 Bn.

Table 2

AIA Consensus Forecast: Twice per year in January and again in July, the American Institute of Architects canvases seven leading forecasting firms looking for each company’s prediction for non-residential construction (NRC), and its sub-categories for the next two years. The forecasting firms include: Dodge Analytics, IHS-Economics, Moody’s, FMI, CMD-iSqFt, Associated Builders and Contractors and Wells Fargo Securities LLC. Table 3 lists these predictions. Yellow highlighted numbers represent the highest estimate for the year/category, and blue highlighted numbers represent the lowest estimates. Moody’s has by far the most optimistic forecast, while the Associated Builders and Contractors has by far the most pessimistic forecast.

Table 4 shows the AIA consensus forecast, estimating 8.3% y/y growth for all NRC 2016, followed by a 6.7% increase in 2017. Breaking this down to its major sub-categories, the consensus forecast for Commercial construction is 9.9% in 2016, increasing to 10.4% in 2017. The consensus forecast for Industrial construction is 11.9% in 2016 falling to 5.3% in 2017 and the Institutional construction consensus forecast is 6.7% for each year.

Table 3 shows some extremely wide variations in estimates, one extreme example is Industrial construction with a 54.6 point spread from -4.9% to +49.7% in 2016. Another case is Amusement/Recreation which ranges from a negative 10.6% to a positive 33.6% growth rate in 2016, a 44.2 point spread. The range of estimates illustrates just how perilous the “science” of forecasting is. Table 5 presents a modified consensus forecast. The thought was that by removing the highest and lowest value from each year and category, the tightened range would yield a more probable outcome. The result did not change the forecast much with the exception of Industrial which narrowed from 11.9% and 5.3% to 7.6% and 4.9% for each of 2016 and 2017 respectively.

Table 3

1st Estimate of Gross Domestic Product in the 4th Q 2015: Fig. 3 shows the headline quarterly results of GDP growth since 1990 and the latest IMF forecast through 2020. In their October revision, the IMF downgraded their forecast of US growth in 2015 from their April estimate of 3.14% to 2.57% and downgraded 2016 from 3.06% to 2.84%. The annualized growth rate in the 1st estimate of the 4th quarter was 0.69%, down from 1.99%, in the 3rd Q and down from 3.91% in Q2. GDP is measured and reported in chained 2009 dollars and in the first estimate of Q4 was $16.442 trillion. The growth calculation is misleading because it takes the Q over Q change and multiplies by 4 to get an annualized rate. This makes the high quarters higher and the low quarters lower. Fig. 4 clearly shows this effect. The blue line is the trailing 12 months growth and the black line is the headline quarterly result. On a trailing 12 month basis year over year, GDP was 1.8% higher in the 4th quarter of 2015 than it was in Q4 2014. In the last five years, since Q1 2011 the trailing 12 month growth of GDP has ranged from a high of 2.88% to a low of 1.07% therefore the latest result is on the low side of central within this variability.

There are six major subcomponents of the GDP calculation and the magnitude of these is shown in Fig. 5. Personal consumption is dominant and in Q4 accounted for 68.86% of the total. The changes in private inventories, net exports and nonresidential construction were negative contributors. Fig. 6 shows the same data as Fig. 5 extended back through Q1 2007 and describes the quarterly change in the six major subcomponents of GDP. Prior to the latest two quarters of data, the last time that inventories made a major negative contribution was Q1 2014. Over the long run inventory changes are a wash and simply move growth from one period to another. The contribution of personal consumption at 1.46% was down from 2.04% in the 3rd quarter. Personal consumption includes goods and services, the goods portion of which includes both durable and non-durables. Government expenditures contributed 0.12% to growth in Q4 down from 0.32% in Q3. The contribution of fixed residential investment at 0.27% in Q4 was unchanged from Q3 and has been fairly consistent for the last seven quarters. The contribution of fixed nonresidential investment has been more variable and declined from positive 0.33% in Q3 to negative 0.24% in Q4. This is disturbing because it is supportive of the Dodge nonresidential starts data and is at odds with the recent Commerce Department construction put in place results. Inventories which had contributed negative 0.71% in Q3 contributed negative 0.45% in Q4. Fig. 7 shows the breakdown of the $16 trillion economy.

Fig 3

Fig 4

Regional Job Creation Q4 2015: Table 6 shows the history of quarterly job creation by region for the last 5 years. All regions had positive job creation in the 4th quarter and in each of the last three quarters of 2015. Problems in the oil and gas industries are evident in these regional employment reports. The South Central region, (TX, OK, LA and AR) went off a cliff in Q1 2015 after having the highest job creation of any region in the previous quarter. This region rebounded in Q2 through Q4 2015 but is nowhere near where it was before the oil price collapse. In the four quarters of 2015, North Dakota has lost 18,800 jobs, Oklahoma has lost 8,900 jobs but Texas has gained 166,900 jobs. In every quarter of 2015, the Pacific region, (CA, OR and WA) has created the most jobs. The regions have fared very differently since the pre-recession high of 1st Q 2008 and since the low point of 4th Q 2009. There are now 5,238,000 more people employed than there were immediately before the recession but of that number half occurred in the South Central, (TX, LA, AR and OK) and the Pacific, (CA, OR and WA) regions. The 3rd Q of 2015 was the first time that every region had more people employed than it did at the pre-recession peak. This continued through Q4, (Table 7). Employment is now 13,668,000 positions higher than it was at the low point of the recession. The Pacific has had the largest number of jobs created during the recovery with an increase of 2,806,000 positions which amounts to 15.2% of total employment. The South Central is in 2nd place with 2,014,000 jobs created which is 13.6% of total employment. The East North Central (IL, IN, MI, OH and WI) currently has the highest number of employed people with 21,620,000, closely followed by the Pacific with 21,329,500, (Table 8).

Table 6

Institute of Supply Management Non-Manufacturing Index: The ISM Nonmanufacturing Index dropped again in January to 53.5 from 55.8, the fourth consecutive month with a decline. The Index is down 6.1 points since its eight year high in July of 59.6 and the lowest reading since March 2014. It is also down nearly 6 points on a y/y basis. Business Activity, New Orders, and Employment all slid in January, however, Supplier Deliveries rose back above the 50 benchmark to 51.5 from December’s precipitous 4.5 point falloff. The Index has been trending down since the middle of 2015 and with the Employment sub index falling significantly, to 52.1 from 56.3, it will be interesting to see the job creation figures when they’re released Friday at 8:30 A.M. EST, (Fig. 8).

Fig. 8

Institute of Supply Management Manufacturing Index: The ISM Manufacturing Index finally stopped its eight month long decline in January with a slight rise to 48.2 from 48.0. Despite the minor increase, the ISM Index has been below the 50 benchmark for four straight months. The Index is down 5.3 points, 10 points, on a y/y basis. There hasn’t been a four month stretch of below 50 readings since the end of the recession in 2009. All sub-indexes rose or remained flat in January except for Employment which dropped significantly from 48.0 to 45.9. Production and New Orders rose above the benchmark to 50.2 and 51.5, respectively. Inventories stayed flat at 43.5. Both Non-ISM and ISM Employment sub-indexes dropped in January ahead of the job creation release on Friday morning. The Manufacturing sector declined for the fourth straight month, however, the overall economy expanded for the 80th straight month, a nearly seven year economic expansion (Institute for Supply Management).

Steel Demand Indicators: Table 9 is a snapshot of the market situation on 2/1/2016. Indicators updated since we last published two weeks ago are shaded beige. In most cases this is not January data but data that was released in the month of January, the actual month to which the data relates is shown in the second column. Of the 26 indicators under consideration, the present situation, 4 are positive by historical standards, 10 are negative and 12 are neutral. This was an increase of two negative and a decrease of two neutral since January 20th. Changes were as follows; The Chicago Fed National Activity Index broke through our -0.20 threshold to a value of -0.24 in January which we consider to be historically low. Therefore was re-classified from neutral to poor. Shipments of long steel products declined to less than 4.5 million tons in December on a 3MMA basis. Therefore were re-classified from neutral to poor. There were no changes to the present situation of either the construction or manufacturing indicators.

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 February 4th 2016. The number of indicators trending positive in this latest analysis was 12 with 14 trending negative. Overall this was an increase of one negative as manufacturing capacity utilization declined. Manufacturing now has four of six indicators trending negative. Construction has four of six trending positive.

We have separated the leading indicators from the main table for a closer look, these are shown in Table 10. Of the twelve leading indicators three are trending positive and nine negative which was no change since December 31st.

(Explanation of Indicators).

Table 9

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