Weekly Market Update - October 1, 2015

Construction Put-in-Place (U.S. Commerce Dept.): Fresh data out this morning reveals encouraging results as Total CPIP rises 10.9% y/y ending August and surged 18.5%, 3 months y/y, Table 1. All project categories were “green” except Power (State & Local). Private construction posted a strong 11.5% y/y growth and a 20.5%, 3 month y/y pace. State and local also recorded impressive gains rising 9.2% for the year and 14.5% on a 3 month y/y comparison. Single family residential saw double digit increases for each of y/y and 3 month y/y measures, noting 16.4% and 19.2% gains respectfully. Momentum (3 month minus 12 month value) rose in every case except conservation (-1.4%). Fig. 1 illustrates total CPIP in constant 2010 dollars from 2005 to present. Note that the percentage increase y/y has increased every month of the year thus far indicating that the trend will likely continue.

Table 2 presents results specific to non-residential CPIP (a detailed subset of Table 1). Total non-residential CPIP surged 22.4% y/y and a stronger 27.9%, 3 months y/y resulting in positive 5.5% momentum. Private construction representing 72.8% of the total shot-up 28.1% y/y and 34.5%, 3 months y/y. State and Local non-residential CPIP also performed well rising 9.2% y/y and 13.6%, 3 months y/y. Manufacturing building posted the strongest numbers year to date, jumping 55% y/y and accelerating to 72% on a 3 month y/y comparison. The only project category to record declining growth was Religious buildings, off 1.3% y/y and down 2.5%, 3 months y/y. Fig. 2 shows historic non-residential CPIP performance in constant 2010 dollars back to 1994. Note the pronounced slope change in the rate of growth from the recession end to 2014 compared to 2015.

Table 1

Fig 1

Growth of GDP. 2nd Q 2015 3rd Estimate: The Bureau of Economic Analysis, (BEA) released the third estimate of Q2 2015 Annual Revision of the National Income and Product Accounts on Friday. The annualized growth rate in the 3rd estimate of the 2nd quarter was 3.9%, up from 2.3%, in the first estimate and 3.7% in the 2nd estimate. GDP is measured and reported in chained 2009 dollars and in Q2 was estimated in this latest revision to be $16.334 trillion.

Fig. 3 shows the headline quarterly results since 1990 and the latest IMF forecast through 2020. Following Fed meeting on 17th, their staff has downgraded forecasts through 2018. Although the estimated growth of real GDP for 2015 has been upgraded from 1.9 percent to 2.1 percent, the growth rates for 2016 and 2017 have both been shaved to 2.3 percent and 2.2 percent respectively. In 2018 the growth rate is expected to drop to 2.0. Historically it has been necessary to have about a 2.5% growth in GDP to get any growth in steel demand so this forecast is not good for our businesses.

Fig. 4 shows the change in the major subcomponents of GDP in Q2 2015 extended back through Q1 2007 and describes the quarterly change in the six major subcomponents. In the latest data there has been a dramatic change in net exports for which we have seen no explanation in our other investigations. In Q1 net exports contributed negative 1.92% and in Q2 contributed positive 0.18%. The contribution of personal consumption increased from 1.19% in Q1 to 2.42 in Q2. Personal consumption includes goods and services, the goods portion of which includes both durable and non-durables. Government expenditures contributed negative 0.01% to growth in Q1 and positive 0.46% in Q2. The contribution of fixed residential investment at 0.30% in Q2 has been unchanged for the last three quarters. The contribution of fixed nonresidential investment increased from O.20% in Q1 to 0.53 in the 2nd. Inventories which had contributed negative 0.87% in Q1 contributed 0.02% in Q2. Increasing inventories make a positive contribution to GDP and over the long run inventory changes are a wash and simply move growth from one period to another. Fig. 5 shows the breakdown of the $16 trillion economy.

Fig 3

Fig 4

Advance Orders for Durable Goods, August 2015: New orders for durable goods in August declined by 2.0% month on month to $236.322 billion. This result was in line with analyst’s expectations and was a result of a decline in transportation orders, mainly civil aircraft. Orders excluding transportation were unchanged. The three month moving average, (3MMA) rose by 1.3%. The 3MMA has been trailing its trend line for the last eight months, (Fig. 6). The huge spike in August last year was a manifestation of the surge in civil aircraft orders in July which resulted in the monthly number being a complete outlier in this data series. The three month moving average, is shown in Fig. 7 for the period January 1993 through August 2015. The year over year growth rate of the 3MMA came in at negative 9.6% in August. Through July the y/y growth of the 3MMA deteriorated for ten straight months to negative 10.0% before improving slightly in August. This index is routinely whipsawed by both civil and military aircraft orders but we include it in our steel analyses because it is a reality check for other manufacturing data and is described by the Census Bureau as one of the earliest indicators for US manufactured goods. Shipments of manufactured durable goods in August were down following two consecutive monthly increases. Primary metals were down in ten of the last eleven months. Unfilled orders were down following two consecutive monthly increases. Inventories were up in two of the last three months.

Fig 6

Dodge Non-residential Construction Starts (square-feet): For the 12 months ending August, Dodge non-residential construction (NRC) starts were up 4.9% y/y. The 3 month y/y metric was up just 0.4% resulting in negative (-4.6%) momentum. Table 3 shows growth rates by project type ranked from highest to lowest. Apartments (>4 stories) dwarfs every other project category, accounting for 24% of the total over the past year and momentum is up a solid 11.4%. Apartments (>4 stories) are included in NCR because the frame could be constructed with reinforced concrete or structural steel. Fig. 8 presents NRC starts from 1990 to present. The dotted line predicts future growth based on the historic growth rate, suggesting it will take until 2017 to reach 1.6 Bn square feet of construction and until 2019 to achieve the level enjoyed in the 2006-2008 period. Fig. 9 shows the growth rate both with and without apartments and the trend line of growth (once again based on an estimated “eye-ball” growth rate since the recession ended). The growth rate without apartments (> 4 stories) is considerable lower.

The next largest project after apartments is warehouses, Fig. 10. Warehouses had a good run of growth since the recession ended, aided by a robust increase in demand for online shopping. That demand has begun to soften and y/y growth has now been negative for 6 consecutive months.

Table 3

Chicago Fed National Activity Index: The (CFNAI) index is a weighted average of 85 indicators of national economic activity drawn from four broad categories of data: 1) production and income; 2) employment, unemployment, and hours; 3) personal consumption and housing; and 4) sales, orders, and inventories. A zero value for the index indicates that the national economy is expanding at its historical trend rate of growth; negative values indicate below-average growth; and positive values indicate above-average growth.

The CFNAI posted negative 0.41 overall results in August and has been in negative territory for six of the past eight months. On a 3 month moving average basis, the index eked-out a 0.01 increase in August on the heels of a 0.02 rise in July, Fig. 11. This infers that growth in national economic activity has been very close to its historic trend. In addition it suggests that there should be limited inflationary pressure on the horizon. Of the 85 leading indicators, 25 made a positive contribution in August while 60 had a negative influence.

The index breaks down into four sub-indexes: 1) Production and income, 2) Sales, orders and inventory, 3) Employment, unemployment and hours and 4) Personal consumption and housing. Fig. 12 presents these sub-indexes from 2005 to present on a 3MMA basis.

The contribution from production fell 0.30 as manufacturing capacity utilization dipped 0.4% m/m. Employment related indicators had a marginal effect (-0.01) in August as employers added 173,000 jobs after a gain of 245,000 in July, (data out yesterday from ADP says the private sector added 200,000 jobs in September). The sales related category added more to the negative side in August, decreasing 0.03 after increasing a like amount in July. A larger negative impact came from personal consumption which fell 0.08 after falling 0.06 in July. The big variable here is housing starts which declined by 35,000 units from July’s 1,161,000 number. The personnel consumption and housing component of the CFNAI never recovered after the recession and has remained below trend  since 2006, Fig. 13.

Fig 11

Fig 12

U.S. Preliminary Long Product Imports (S.I.M.A.): Data published September 29, 2015 reported US steel long product imports totaled 535,000 tons (kt) for the month of August, up 6% m/m. On a YTD basis,  long product imports totaled 4.332 million tons (mt), a 9% y/y increase, (Table 4). Rebar imports rose 53% YTD y/y, as the US imported 1.396 mt in the eight months through August. Approximately 15 kt of rebar that was requested to import during July but not arrive until August. Wire rod imports rose 48% from July to August, as the US saw increased wire rod shipments from Japan, South Korea, Brazil and South Africa. Heavy structural imports, including beams fell 4% m/m, and rose 11% YTD y/y. Year to date 415 kt of beams were imported, up 18% y/y, while 228 kt of heavy angles and channels arrived on US shores, a y/y increase of 11%. Light angle and channel imports fell 17% in August, and were down 12% y/y for a total of 114 kt YTD.

Table 4

Steel Demand Indicators: Table 5 is a snapshot of the market situation on 9/30/2015. Indicators updated since we last published two weeks ago are shaded beige. The latest month or quarter for which data is available is identified in the 2nd column. Of the 26 indicators under consideration, the present situation of 6 are positive by historical standards, 7 are negative and 13 are neutral. This was no change from when we published on September 2nd and September 16th. Looking at the 12 leading indicators separately, 3 were negative 7 were neutral and 2 were positive which is proportionately about the same as the total 26. There has been no change in our perception of the current state of the leading indicators in the last seven updates.

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 September 30th. The number of indicators trending positive in this latest analysis was 16 which was a decrease of one since September 16th and of two since September 2nd. One indicator, the price of Chicago shredded was unchanged since our last update. In the general economy there was one trend reversal and this was very slight. The Chicago Fed National Activity Index changed from + 0.08 in July to – 0.01 in August. Both results are almost exactly on the neutral threshold meaning that the economy is expanding at a historically normal rate. The trade weighted value of the US dollar which had been declining in May took off again in June, July and August a trend that we regard as a negative for net steel imports. There were no trend reversals for the long product market indicators or in the construction and manufacturing indexes since we last published on September 16th. The trends in the leading indicators are not as good as the overall 26 indicators with 7 of 12 headed in the wrong direction. (Explanation of Indicators).

Table 5

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