Weekly Market Update February 6, 2014

U.S. Commerce Department Construction-Put-in-Place: Total inflation adjusted construction spending was up 4.0% for the three months ending December vs the same period one year earlier, down from the 7.3% clip on a twelve month y/y basis. Private sector spending slowed from an 11.1% y/y pace to a 5.8% y/y rate 3 months y/y. This was mostly due a slowdown in single family residential. State and local spending was down 0.6%, 3 months y/y, less than the 1.3% decline recorded on a twelve month timeline, (Table 1). Non-residential construction spending was up 7.1%, 3 months y/y, spending was up 4.6% on a 12 month y/y basis, (Table 2). Private sector spending jumped 13.6%, 3 months y/y and 10.3% y/y, while State and local spending was off 5.6% for both 3 and 12 month comparisons. After a 43.7% y/y surge, apartments slowed down to a 34.3%, 3 month y/y pace. Most sectors are showing solid growth and momentum with the exception of education, public safety and religious facilities. Private building construction excluding single family structures is picking up. Fig. 1 illustrates that compound annual building growth rate (CAGR) has returned to its historic post-recovery rate of approximately 10.7%. If the rate continues at the same slope, a spending level of $17 BN per month will be realized in 2016, roughly the average rate throughout the boom period between 2002 and 2007. State and local government spending on highway pavement continues to be far below the long term average and is yet to show any signs of recovery, despite an (aggregate) improving revenue picture, (Fig. 2). Office construction activity remains flat at levels not seen since the mid-nineties, (Fig. 3). Conversely manufacturing buildings have staged a solid recovery since the end of the recession, (Fig. 4).

Table 1

Institute of Supply Management Indexes: The ISM manufacturing index tumbled 5.2 points to 51.3 (>50 = strengthening, < 50 = weakening), in January, (Fig. 5). The new orders sub-index plummeted to 51.2 from 64.4, the largest decline since 1980. There was split amongst industries with eight recording gains in orders and seven posting declines. The production sub-index plunged 6.9 points to 54.8. Inventories fell to 44, the second consecutive month below the 50 (expansionary threshold). Despite the all the negativity, the ISM index still posted an expansionary value in January and the trajectory for the index remains positive. After all the weather related issues pass, we will be able to gauge a truer reading of the course manufacturing will take in 2014. The non-manufacturing index rose one point to 54.0 in January. The business activity sub-index was the largest contributor rising 3 points to 56.3. The employment sub-index gained 0.8 points which bodes well for future consumer spending and indicates that firms may be increasing hiring over the next several months. Of concern is the recent decline in equity prices which may stall the recent acceleration in GDP.

Fig 5

Global Business Confidence fell for the fifth consecutive week, reporting in at 37.2%.  The decline, starting at the beginning of the year, came after nine straight weeks of confidence growth. The index has improved from 19.3% to 37.2% y/y, a 93% increase. North America Business Confidence slid for the first time in eleven weeks, however, has remained above 40.0% for the past six weeks. This is the 52nd straight week with a reading above 20%, the minimum benchmark for an expanding economy,(Fig. 6).  Every indicator, except for Hiring Intentions, fell this week; however, Hiring Intentions has remained above 20% for the 18th consecutive week dating back to the first week of October 2013.  This figure coincides with net job creation which totaled 928,000 jobs from August to December 2013. There may be a strong correlation between the two, with the Hiring Intentions readings remaining strong during the BLS’ release of the monthly employment situation. 

Fig 6

New Claims: For the week of January 25th, the advanced figures of the four week moving average new seasonally adjusted employment claims were 333,000, a rise of 750 from the previous week. Since the sample period for this indicator is volatile due to the nature of the survey, one week, the four week moving average is typically used. The benchmark for employment growth is 300,000 new claims. The current weeks’ figures are slightly above the 300,000 mark but remain at levels seen during the mid-2000’s expansion. Seasonally adjusted continuing claims fell to 2.99 million, a 7% drop on a y/y basis. This indicator has remained below the 3,000,000 mark for much of the second half of 2013, with the four week moving average staying under for the 25th straight week. This number may fall further, however, because it doesn’t include persons who’ve exhausted their UI benefits, as seen with the failure of Congress to extend said benefits to the long term unemployed, (Fig. 7).

Fig 7

Portland Cement Shipments: November Portland cement (data 2 months delayed) were up 7.6%, 3 months y/y. The West South Central which has shown the strongest growth of all regions since the great recession slowed 2.4%, 3 month y/y. The East South Central declined a modest 0.2%. All other regions recorded growth, led by an 18.7%, 3 month y/y jump in the Middle Atlantic and a 13.1% jump for the Pacific West Coast, (Fig. 8). Despite the admirable y/y increase in shipments, the aggregate total remains at approximately two-thirds of the pre-recession high, (Fig. 9).

Fig 8

Federal Reserve Senior Loan Officer Survey, January 2014: Once a quarter the Federal Reserve surveys the senior loan officers of domestic banks and U.S. branches and agencies of foreign banks. Questions cover changes in the standards and terms of the banks' lending and the state of business and household demand for loans. The January survey was very positive for businesses with demand for commercial and industrial loans from both large and small firms increasing. Banks eased lending standards to all firms but the proportion of banks reporting an easing of terms to small firms decreased. A majority of banks are still reporting an increase in demand for and easier terms for construction and land development loans. Demand shot up in January to the point that a net 28.3% of banks were reporting an increase in demand, What this means is that the number of banks reporting an increase in demand for construction loans was 28.3% higher than the proportion reporting a demand decrease. The bad news in this report is that a net 28.2% of banks reported a decrease in demand for prime mortgage loans and more banks were tightening standards than were loosening, (Fig 10).

Fig 10

Steel Demand Indicators: Table 3 is a snapshot of the market situation on 02/06/14. Ten of the “present situation” indicators are still depressed by historical standards of which five are from the construction sector. These are identified in red. However eleven are green which is the best result for the present situation since we began this analysis in February 2010 when only three of the present situation indicators were green. Seven of the present situation indicators are neutral by historical standards. Overall trends are good with 22 of 28 indicators moving in the right direction. This also is the best result since February 2010. In most cases values are three month moving averages. When this analysis was last published two weeks ago twenty indicators were trending positive and eight negative. What changed in this latest analysis was that both measures of bank lending standards moved from a negative to positive trend. The latest month or quarter for which data is included is identified in the 2nd column. Indicators updated since last published are shaded beige. (Explanation of Indicators).

Table 3

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