Weekly Market Update July 18, 2013

State and Local Tax Receipts Q1 2013 continued their upward climb. Total state tax revenue was $205.1 billion in the first quarter of 2013, up 8.9% from the $188.5 billion reported in the same quarter of 2012. Individual income tax, at $73.3 billion was up 19.1% from the same quarter of 2012, which was largely driven by California with $18.2 billion in personal income tax revenue. The second largest category of state tax revenue, general sales and gross receipts taxes, accounted for $63.8 billion, an increase of 5.7% from the same quarter in 2012. At $10.2 billion, corporate net income tax collections increased by 9.5% from the same quarter in 2012. Overall, in the first quarter of 2013, individual income tax accounted for 35.7% of total state tax revenue, general sales and gross receipts taxes accounted for 31.1%, and other tax revenue accounted for 33.1% of total state tax revenue, (Fig. 1). Total local tax revenues for Q1 2013 were $149.6 billion, up by 4.1% from Q1 2012. Property taxes are by far the greatest contributor to local government income and were up 2.9 % in Q1 2013 compared to Q1 2012. Property taxes accounted for 76% of total local government income in Q1. Sales taxes were the second largest source of revenue and totaled 8.2% of the total in Q1 showing an increase of 2.8% from Q1 2012, (Fig. 2). The implications for non-residential construction are that the state and locally financed sector should begin to stabilize; however, lost revenue since the recession and the increase in entitlement obligations will prevent any significant recovery in the medium term.

Fig 1

Portland Cement Consumption fell -0.8% 3MMA y/y in April on a national basis, (Fig. 3). Overall cement consumption growth continues to be anemic, since the recovery began. Public infrastructure projects consume a significant ratio of total concrete use and these projects continue to be hampered by, (albeit improving) strained budgets. (Fig. 4) presents total public infrastructure expenditures on a rolling 12 month basis. The $787 billion American Recovery & Reinvestment Act (ARRA) stimulus was largely exhausted by the end of 2012. Since then, spending has leveled-out and has remained flat since then. The good news is that the percentage change in y/y terms has reversed after 29 months of decline and is now moving in a positive direction. Growth in consumption varies considerably throughout the country, (Fig. 5). The Midwest, Mid-Atlantic and Northeast all posted declines while the West, Southwest and South-Atlantic show expansion. From a volume perspective, the West-Southwest region consumed the most cement at 22.8% of the 12 month running total of 76.74 million metric tons. The South-Atlantic was the next largest consumer at 16.2%, (Fig. 6).

Fig 3

Manufacturing Capacity Utilization measured 76.04% in for the three months ending June down 0.32% from the January through March period and up a tepid 0.27% y/y, (Fig. 7). The Federal Reserve reported yesterday that manufacturing production rose 0.3% in June from May. This is on the heels of a 0.2% gain the previous month. Despite the improvements the gains barely offset large production declines in March and April. Manufacturing has cut jobs in each of the past four months, reducing employment levels by a total of 24,000 since February, (Fig. 8). The primary cause for this weakness is slower global growth which has cut demand for U.S. exports. Europe remains in a recession and China's economy grew at the slowest pace in more than two decades from April through June. The Commerce Department reported that U.S. businesses reported a strong 1.1% increase in sales in May and that they only increased their stockpiles slightly. This suggests that they will need to increase inventory to keep up with demand. Americans bought more vehicles, furniture and clothes in June, according to a separate Commerce report on retail spending. However, consumers cut back almost everywhere else, as overall retail sales increased just 0.4% m/m.

Fig 7

Commercial Property Price Index: The national 3MMA CPPI increased by 0.3% m/m in May and by 6.3% y/y as commercial property prices continue to recover across the nation, (Fig. 9). On a m/m basis the national all-property composite index decreased by 0.6%. Apartments which makes up approximately 28% of the index increased by 1.3% while the larger core commercial component (remaining 72%) fell by 1.3%. Major market prices have recovered more strongly than non-major markets. The percentage peak to trough recovered for major markets through May was 76.7% as compared to just 35.1% for non-major markets, (Fig. 10). Table 1 presents a summary of CPPI sub-indicies peak-to-trough recovery. Apartments in major markets have faired the best since the trough, while suburban offices in non-major market have seen the poorest rate of recovery. Property price appreciation follows non-farm employment gains. Fig. 11 examines the period between Q2’09 and Q1’13. During this time period, Dallas/Houston/Austin employment increased 8.7%, commercial property prices soared by 60%. Other markets, where prices appreciated, have shown strong growth include: Denver, San Francisco, and New York. These areas have also all had solid employment growth. Tampa, Orlando and Jacksonville have seen a recent surge in property values. Once again positive employment trends explain the rise. On the other side of the spectrum, Philadelphia, Baltimore, Las Vegas and Sacramento are all posting declining commercial property pricing. Each of these cities has seen declining employment levels.

Fig 9

Producer Price Index, Engineered Products: Table 2 presents data on the change in PPI of several engineered carbon steel products and its primary competing materials. The price of carbon steel castings has increased sharply relative to aluminum mill shapes and impression die forgings, (Fig. 12). This would indicate that impression die forgings should have a competitive advantage vs. its competing materials. The price of carbon steel wire was down 3.1% y/y June, while plastic construction product is up 0.3% over the same time period. This would indicate that wire should have a competitive advantage vs. plastic, (Fig. 13).

Table 2

This week’s contributors include Peter Wright and Steve Murphy.