Weeky Market Update - August 27th, 2015

GDP (Second Estimate) : The U.S. Bureau of Economic Analysis (BEA) reported today that the real gross domestic product (the value of the goods and services produced by the nation's economy less the value of the goods and services used up in production, adjusted for price changes), Q2 second estimated of was revised sharply upwards from a 2.3% annual rate to 3.7%. BEA

Industrial Construction Starts: Referencing Table 1, industrial starts fell 11.8% y/y ending August and were off 34.9%, 3 month y/y. As previously discussed in this forum, industrial starts are historically volatile. As evidenced in Fig. 1, even on a rolling 3 month y/y chart there can be huge gyrations month to month. Looking at the same data on a 12 month y/y basis smoothest the data to the point where trends can be observed more clearly, Fig. 2. On a rolling12 month y/y basis starts have declined for 10 months in a row through August. In addition the shaded area, confirmed project, the balance of 2015 through 2017 (source: Industrial Information Resources), has a downward bias.

Project categories recording “green” on a 3 month y/y basis include: Pulp, Paper and Wood, Food & Beverage and Pharmaceutical & Biotech. All other project categories posting negative growth including Production Oil & Gas (POG). POG posted -20.8%, 3 month y/y growth, but 168% 12 month y/y growth, the first indication that a slowdown may be on the horizon. POG had recorded very strong 12 month y/y growth in 11 of the past 12 months, seemingly not affected by the large decline in the price of oil.

Fig. 3 presents a regional map of the US, showing the three month total spending in billions and the 12 month y/y in percentage terms. For the period ending August there were only two “green” regions, the Southwest and the Southeast. The balance of the country recording declining y/y performance. Despite the decline in energy prices, the Southwest continues to dominate both in the ratio of expenditures and in percentage growth.

Table 1

Fig 1

US Light Vehicle Sales and NAFTA Auto Production: At 17.5 million units, US light vehicle (LV) sales were the second highest of the year. Light trucks continued to pull ahead of automobiles with sales of 9.7 million units and 7.8 million respectively. Imports fell from 3.7 million units to 3.5 million for an import market share of exactly 20%. Import market share has been trending down this year and is well below the 30% level reached in early 2009.

Total light vehicle, (LV) production in NAFTA in July was at an annual rate of 15.557 million units, down from 18.543 in June. On average since 2004, July’s production has been 29.2% lower than June, July this year was down by 16.1%. There have been reports in the press that some auto companies planned to curtail their summer maintenance shutdowns this year which would explain why July was better than normal. Total light vehicle inventories in the US decreased by 2 days of sales from 60 at the end of June to 58 at the end of July, three days less than the end of July last year. Month over month FCA (Fiat Chrysler Automotive) was up by 4 days to 82, Ford down by 2 days to 65 and GM down by 6 days to 64.

On a rolling 12 months basis y/y LV production in NAFTA increased by 3.1% through July. LV production in NAFTA is now well above the pre-recession peak of Q2 2006 and is heading for the all-time high of mid-2000, (Fig. 4). On a rolling 12 months basis y/y the US is up by 3.1%, Canada is down by 4.9% and Mexico is up by 9.6%, (Table 2). Growth rates in 3 months through July y/y indicate that the US has positive momentum but that of Canada and Mexico is negative. The US has gained production share in the most recent 3 ½ years and so far in 2015 that gain has accelerated at the expense of Canada. Mexico’s share has been fairly flat. In July on a rolling three month basis, the US production share of total light vehicles was 68.1%, down from 69% in May which was the highest since March 2008.

The mix of light vehicles is very different by country, (Fig. 5). The percentage of autos in the Mexican mix in the last three months was 59.1% but only 35.6% in the US and 41.1% in Canada. This was the lowest % of autos in the US mix since July 2011 as buyers preference tilts towards light trucks driven by declining gas prices.

Fig 4

Table 2

The Chicago Fed National Activity Index (CFNAI): The 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. Fig. 6 shows our analysis of the 3MMA of the CFNAI through July which has risen for each of the last four months and in July reached the neutral threshold, (see explanation below). Fig. 7 shows the trends of the four main subcomponents. There has been a gradual five year improvement in personal consumption and housing that is ongoing though still below the neutral level. The other three sub-components continue to be erratic, with employment and hours worked currently the strongest.

Fig. 8 shows that the CFNAI has historically been a reasonably accurate leading indicator of steel demand, (apparent supply) with a lead time of six to nine months. Total steel supply was closing the gap but in the last eight months has fallen off again. Fig. 9 show this same relationship for long products separately and the difference, comparing these two graphs shows how far long products are behind the overall situation for steel. This is in agreement with our analysis of steel service center shipments. Flat rolled driven mainly by manufacturing is about where it should be but long products driven mainly by construction are still depressed. Based on the historical lead of the CFNAI it looks as though total steel demand will pick up slightly in the remainder of 2015.

Fig 6

Fig 7

Non-residential Construction Starts (Dodge): NRC starts were up 6.8% y/y and 6.5%, 3 months y/y ending July indicating a slight momentum decline, (Table 3). Apartments (>4 stories) continue to rank #1 in both terms of total square feet of construction and for largest percentage gain (3 months y/y). Momentum is strong at +27.5%, indicating that robust demand for apartments is likely to continue. Fig. 10 compares the growth of Dodge NRC starts both with and without apartments. Nationally without apartments, growth has started to decline (blue circle inset), while with apartments plateaued for a few months, then declined slightly for a brief period. It has since returned to growth (red circle inset). Only four project categories posted positive momentum in July (momentum = 3 month y/y growth is greater than 12 month y/y), these include: Transportation, Recreation and Apartments. All other project types realized negative momentum, led by Manufacturing buildings (-47%) followed by Offices and Banks (-24.7%).

Table 3

US Producer Price Index: The Producer Price Index published by the Bureau of Labor Statistics tracks the average change in prices over time of domestically produced and consumed commodities. BLS reports monthly, but does not measure actual price, it measures an index that tells us what direction prices are headed. In most cases 1982 = 100. We at Gerdau strive to stay apprised of price movements, as cost escalation can affect future business, and is particularly true of state and locally financed projects. PPI of commodities affects energy and mining industries, which in turn drives demand for many long products.

The producer price index of all commodities (Fig. 11) has fallen on a percentage y/y basis for the past 8 months. Viewing the 3 month moving average of the index shows a recent uptick, yet prices remain well below summer 2014 levels. Table 4 is a summary for construction steel and competing material price indexes. It shows the percent change of the PPI compared to 3 months ago, 6 months, 12 months and 24 months ago. Construction material PPI rose 0.6% over the past 12m, as the indexes for the most recent 3m were flat compared to February through April. Nonresidential components saw decline in prices compared to 6m, 12m and 2 years ago. PPI for commercial structures fell in July, down 2.4% y/y, while warehouses, offices and industrial structures rose, (Table 5). Rebar and similarly driven price indexes also reflected a rise compared to 3m, 6m, 12m, and 2 years ago. PPI for hot-rolled bars declined 8.9% from only 3 months ago, compared to spring indexes, and was down when viewed against 6m, 12m and 24 months ago, (Table 6). Carbon steel impression die forgings were down, as competing products such as aluminum saw small increases in PPI.

Fig 11

Table 4

Consumer Confidence: The Consumer Confidence Index rose sharply in August to 101.50 from 91.00, one of the largest monthly increases in the last four years. It is the highest reading since January. August’s reading is up nearly 9% on a y/y basis. This figure is above 90 for the 14th consecutive month.

The Present Situation sub-index soared in August to 115.10, the highest reading since Q4 2007. This figure is up an astonishing 23% on a y/y basis, (Fig. 12). A stronger labor situation has contributed to the rise in the Present Situation. The sub-index has been above 100 for the eighth straight month, the longest such stretch since Q4 2007 – Q1 2008. The Expectations sub-index also rose more than 10 points in August to 92.50 from 82.30 in July. It is the highest monthly increase in two years and above the 2015 YTD average of 90.5. Despite the strong month, this sub-index is still down 1% on a y/y basis.

Labor market conditions also rose with those expecting plentiful jobs increasing to its highest level of 2015, at 21.9. Conversely, those consumers expecting a pay increase declined for the fourth straight month also to its lowest level of the year at 16.2. This figure is down 3.3 points YTD. This points to consumers believing that only lower paying jobs are going to be available in the near future. Buying plans plummeted in August with Home, Auto, and Appliance categories falling across the board. Consumers are confident yet cautious about buying plans hints at the possibility of the fist Fed Funds rate increase in nearly a decade; however, inflation expectations remain subdued.

Fig 12

U.S. Job Openings & Turnover Survey (JOLTS): Overall, a solid month to month change for three of the four regions but less than stellar performances for the Construction and Manufacturing industries. The unemployed persons per job opening is significant enough to monitor as net job creation growth should contribute to a tighter job market and therefore higher wages.

The JOLTS reported 5.249 million job openings at the end of June, a 2% fall from May and 10% rise on a y/y basis. There have been more than 5 million open jobs since February, the most and longest stretch on record.

A significant detail from the JOLTS report is the unemployed persons per job opening. This is a ratio of the two numbers to create an idea of how many unemployed persons are available for each job opening. During the recession, this number reached a peak of 6.8; meanwhile, in the latest release for June, the ratio was 1.6, the lowest since before the recession. This is a positive sign of an improving job market. On the contrary, there is still a lot of room for growth in this category as the mid-2000s expansion were experiencing 3 million quits a month regularly. Perhaps when wage growth, under 2.5% since late 2009 (St. Louis Fed), takes off the economy will see these figures rise.

All regions, except for the South, experienced a drop in job openings in June. The West fell the most with an 8% month on month decline, the largest such fall since July 2012. The Northeast fell for the third time in four months. This region has the fewest open jobs since October 2014. The Midwest saw a 2% falloff while the South had yet another jump in job openings, its eighth in the last nine months. The South has 2.063 million job openings, its highest on record and most out of the four regions, (Fig. 13).

Jobs in the Construction industry fell 14% in June, the second double digit decline in the last three months. This industry typical sees monthly volatility in job opening reports, however, it’s down 5% on a y/y basis. Correspondingly, the construction industry produced zero net new jobs in June; only the second time in the last 19 months that it did not produce positive job creation. Manufacturing jobs also declined in June, falling 8%. June yielded the lowest job openings since October 2014. Despite the poor result, the Manufacturing industry has created 49,000 net new jobs in 2015 YTD. Trade, Transportation, and Utilities fell 1% in June and is up 15% on a y/y basis.

Overall, a poor month to month change for three of the four regions and even worse performances for the Construction and Manufacturing industries, (Fig. 14). Conversely, the unemployed persons per job opening is significant enough to monitor as economics dictate that net job creation growth should contribute to a tighter job market and therefore higher wages.

Fig 13
Fig 14

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