Weekly Market Update - April 3, 2014

Construction Put-in-Place: Total construction CPIP grew 8.3% y/y and 9.8%, 3 months y/y ending February. Private construction was up 12.2% y/y and 13.4%, 3 months y/y indicating positive momentum going forward. Single family residential while up 26.4%, 3 months y/y, was up 20.8% y/y, pointing to a slight stall with momentum down 5.6%. Non-residential buildings recorded a 5.7% increase on a twelve month basis and surged to 9.5%, 3 months y/y in an encouraging move, Table 1. Breaking down non-residential construction, we see that the private component surged ahead 11.4% y/y and 16.1%, 3 months y/y. State and local construction continues to post declines, down 5.0% y/y and off 4.5%, 3 months y/y. Apartments continue to post strong numbers, but are beginning to slow from the torrid y/y pace of +40.7% to +32.4%, 3 months y/y. Lodging, manufacturing, office, recreation all posted solid growth with positive momentum, Table 2. Despite the strong recent growth in percentage terms a multi-year graph serves to put things into perspective, Fig. 1. At the current expenditure level on total private and state and local construction we remain $1.1 billion dollars (2.7%) below the 1994 level in constant 1996 dollars.

Table 1

Industrial Construction Starts: Total industrial starts expenditures were down 13.2% y/y. The main reason is a sharp decline in power project starts, off 49.5% y/y, Table 3. Fig. 2 illustrates a rolling 12 month chart of power plant starts from 1994 to present, to include 2014 confirmed projects. A rolling 12 month chart is employed because it smooth’s out the tremendous m/m volatility that is the norm in the industrial construction sector. To further illustrate this point, Fig. 3 plots the same data presented in Fig. 2 on a monthly basis. Two to five billion dollar m/m spikes occur regularly, but in 2012 there were two 15 billion dollar spikes when the Vogtle nuclear (3 & 4) units broke ground in Georgia. Recall that a “Start” counts the entire expenditure of the life of a project in the month a project begins. The construction build-out may take years as will be the case for the Vogtle project, check out the latest progress photos: ( Despite the short term decline in power starts, the long term trend is decidedly positive a illustrated by the trend line. Project categories showing strong growth include: 1] Production, oil and gas, up 17.2% y/y with a bullish outlook for 2014, 2] Transmission, oil and gas, up 67.2% y/y but anticipated to fall-off throughout 2014 and 3] Chemical processing, up 55.1% y/y with a bullish outlook for 2014, Fig. 4.

Table 3

Industrial Production and Manufacturing Capacity Utilization: The IP index came in at 101.63 for February; this was the fourth consecutive month for the index to exceed the pre-recession peak of September 2007. The 3MMA of the index expanded by 0.62 m/m and by 2.9 y/y to101.27. This index is based on the July 2007 level being defined as 100, (Fig. 5) and is seasonally adjusted. Manufacturing capacity utilization was 76.43% in February, up from 75.93 in January. The 3MMA declined by 0.09 percent to 76.36% but was up by 0.42% y/y, (Fig. 6). The latest National Association of Manufacturers survey found that 86.1% of respondents were positive about their company’s outlook, up from 78.1% three months ago, with increased expectations for sales, exports, employment and capital spending. Still, smaller manufacturers were less positive, particularly in their investment plans. The top challenges were the business climate and rising health care and insurance costs, with respondents noting the need for comprehensive tax reform and expressing concern about ever-increasing regulatory burdens. The Federal Reserve Beige Book released on March 5th reported that manufacturing activity expanded at a moderate pace from January through early February in most Districts. Several districts reported that severe winter weather had a negative effect on sales and production during this period.

Fig 5

Corporate Profits finished 2013 up 6.2% y/y and were up 2.2% q/q. Over two years corporate profits were up 9.0% and since Q3-2008 were up 113.5%, Fig.7. According to Forbes magazine, corporate profits are at an all-time high and are expected to continue to grow in 2014. Moody’s business confidence index shows that business sentiment remains strong. The recent stall in growth has been attributed to a harsh winter and expectations are especially optimistic for expansion through the summer. U.S. confidence surged after the government reopened last fall and as concerns over a repeat performance waned. In its most recent survey, a record 75% of respondents felt conditions will continue to improve. Hiring intentions are strong which translates to U.S. growth of over 200,000 jobs per month. Nearly half the respondents said they were hiring, indicating the strongest hiring since the survey began in 2003. These survey results contradict data presented by the Bureau of Labor Statistics, however should the hiring be forthcoming, a promising response indeed. Regulatory and legal issues linger as the greatest worry with over one-third of respondents reporting this as their biggest concern. The combination of record amounts of cash sitting on the sidelines coupled with pent-up demand for new and improved facilities should translate into a surge in non-residential construction demand.

Fig 7

New Claims: For the week of March 29th, the advanced figures of new seasonally adjusted unemployment claims were 326,000 a rise of 16,000 from the previous week. The benchmark for employment growth is 300,000 new claims. The current week’s figures are slightly above the 300,000 mark but remain at levels seen during the 2000’s expansion, Fig. 8. The four week moving average is roughly 30,000 new claims lower on a y/y basis. Seasonally adjusted continuing claims rose to 2.83 million, an 8% drop on a y/y basis. This indicator has remained below the 3,000,000 for most of the past ten months, with the four week moving average staying under for the 34th straight week. This number may fall further, however, because it doesn’t include all persons who’ve exhausted their UI benefits. On April 2, Congress passed a procedural vote which will allow a final vote on a bill to extend UI benefits to the long term unemployed.

Fig 8

ISM Manufacturing Index rose to 53.7 in March, its third consecutive month of expansion. The small growth signifies that winter is ending and manufacturing is starting to pick up again. A value greater than 50 signals a growing economy, Fig. 9. The Production Index came in at 55.9, recovering from February’s reading of 48.2, due to harsher than normal winter conditions across most of the country. March’s figure is the first increase in four months. New orders increased for the third straight month after the large decline in January. Overall, indexes were mixed in responses, however, expansion in production and new orders may prove the harsh winter is finally over and economic activity can increase in the 2nd quarter of 2014.

Fig 9

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