Weekly Market Update - November 6, 2014

Construction Put-in-Place: Total CPIP increased 1.9% 3months y/y with $230 billion spent over the last 3 months and by 5.8% y/y. Private construction increased by 2.5%, 3 months y/y and by 8.3% y/y. Total State and Local spending rose 0.7% 3 months y/y, the fifth consecutive monthly increase after 20 months in a row of decline, (Table 1). The largest percentage gainer was conservation, rising 37%, 3 months y/y and 24.7% over the past 12 months. Highways and streets posted negative growth of 0.8%, 3 months y/y, but was up 2.4% y/y. Spending on highways and streets (constant 2010$), has barely budged from the recession low point and remains roughly $10 Bn (rolling 12 month), below the $55 to $57 Bn (rolling 12 month) average range realized in the period between 2001 and 2010, (Fig. 1). Fig. 2 compares previous recovery cycle slopes vs. the trajectory of the current recovery. The superimposed red arrows illustrates just how weak the current recovery is compared to the 1994 to 2000 expansion and the 2004 to 2008 growth rate. At the current growth rate, it would take another five years to get back to the middle of the range realized over the 20 years depicted in Fig. 2.

Non-residential CPIP rose +8.1%, 3m y/y with spending of $93.7 billion over the last 3 months; $64 billion spent on Private Construction and 30 billion spent on State & Local projects. Expenditures were up 7.0% y/y, indicating positive momentum of 1.1%. The private sector component increased 11.4%, 3 months y/y and 11.3% y/y, while State and Local posted a positive 1.6%, 3 months y/y vs a negative 1.7% on a 12 month basis. Apartments (> 4 stories) continue to record large percentage increases: up 32.7%, 3 months y/y and 34.6%, y/y. Education was up 1.3%, 3 month y/y but negative 2.4% on a 12 month comparison. Education has recorded 56 consecutive months of 12 month y/y declines. On a 3 month y/y basis, the only project groups that had declining growth include: Health Care and Public Safety, all other categories were “green”, with several recording double digit growth, (Table 2).

  Table 1

Fig 1

Industrial Construction Starts: Table 3 presents a rather negative picture of industrial construction starts with total spending down 6.8% y/y and 3 month y/y spending down 58.1%. The fact that 3 month y/y spending is off much more than 12 month y/y spending indicates strong negative momentum (-51.3%) which is very concerning. However as Fig. 3 illustrates, the growth over the past couple of years has been phenomenal. Twelve month total expenditures through October were as follows: 2010: $71.4 Bn, in 2011: $111.7 Bn, 2012: 136.0 Bn, 2013: $160.0 Bn and in 2014: $149.1 Bn. So 2013 was an exceptionally high year after a period of exceptionally high growth and as such makes 2014 look bad when in effect growth remains very strong by historical standards (which ranged from $50 to $100 Bn between 1994 and 2010). The big question is: Is the latest dip the start of a major downtrend or a “blip” on the radar much like that which occurred in 2013 (see inset oval on Fig. 3)? Our understanding is that most industrial fabricators have decent backlogs for energy, manufacturing and power projects. It is probable that decline in the price of oil may eventually take some of the “steam” out of this surge in activity, but for now indications continue to look promising heading into 2015. All regions of the U.S. recorded declines 3 months y/y except New England (+266%, 3 months y/y). The Southwest posted a strong y/y growth of 48.3% y/y representing almost one third ($48.0 / $149.1) of total expenditures. However, on a 3 month y/y basis growth contracted by 44.3% leading to sharply negative momentum of -92.6%, (Table 4).

Table 3 

Fig 3

Gross Domestic Product 3nd Q 2014 1st Estimate, (Source; (BEA): The annualized growth rate in the 3rd Q was 3.50% which was down from 4.51% in Q2 but still exceeded most analysts’ expectations. GDP is measured and reported in chained 2009 dollars and in Q3 was $16.151 trillion. Fig. 4 shows the quarterly results since 1990 and the latest IMF forecast through 2018. The reported GDP growth in the 2nd and 3rd quarters was in line with Q3 and Q4 last year. As expected, based on the strong Q2 result, the IMF increased its forecast for the US in the October World Economic Outlook report. Fig. 5 shows the change in the major subcomponents of GDP. Comparing Q3 with Q2 there were major changes. Inventories and net exports did an equal and opposite reversal. Net exports changed from slightly negative to strongly positive. Inventories changed from strongly positive to slightly negative. 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. Nonresidential construction contracted and government expanded, both more than could be expected on such a short term comparison. Residential construction contracted by $1.7 billion. The contribution of personal consumption shrank from 1.75% to 1.22%. Personal consumption includes goods and services, the goods portion of which includes both durable and non-durables. In the 3rd Q personal consumption accounted for 67.9% of total economic activity, exactly the same as Q3 last year.

Fig 4

Currencies: The U.S. Dollar Index came in at 106.6708, the highest since 2009 and has strengthened 6.0% on a y/y basis and 3.4% over the past three months against the Daily Broad Index, (Table 5). A strong economy, relative to the rest of the world, has helped the Dollar strengthen as Q3 GDP grew at a 3.5% annualized clip. The Quantitative Easing program by the Fed Reserve calmly ended last week after six years of the policy. The Dollar strengthening makes scrap from the U.S. less attractive to buy on the global market and steel less attractive to buy from the U.S. The Japanese Yen has been declining precipitously over the past two weeks as the Bank of Japan declared another round of quantitative easing in efforts to depreciate the Yen even further. The new plan entails the BoJ growing its balance sheet to 15% of GDP every year. The Yen, as of November 5th, was at ¥113.56, levels not seen since November 2007. 2nd Quarter GDP fell an annualized 7.1% q/q. The decline primarily came from consumer spending, which fell dramatically, in part to a planned April sales tax increase (VAT), from 5% to 8%. Prime Minister Shinzo Abe has been undertaking the controversial methods to get Japan out of its two decade long deflationary period and to boost inflation.

The Russian Ruble has fallen more than 25% on a y/y basis and nearly 8% in the last month, due to tumbling oil prices, a strong U.S economy, and Western sanctions. Oil, which is priced in dollars, has collapsed more than 14% in the last month, is a primary export for Russia. The currency has continuously reached all-time lows versus the U.S. Dollar, with a value as of November 5th, of 43.54. The Russian Central Bank has ceased the currency intervention program that set up stabilizers if the Ruble went outside its narrow trading band. It has since taken up a program that supports the Ruble up to $350 million per day. The markets did not react kindly to this plan as the currency plunged during the opening trading hours on November 5th.

Table 2

The Chicago Fed National Activity Index: The CFNAI is a weighted measure of 85 economic indicators that gauge economic activity and inflationary pressures (Federal Reserve Bank of Chicago). The indicators are derived from production and income, employment, unemployment and hours, personal consumption and housing, and sales, orders, and inventories. The Index has a value of 0 and standard deviation of 1, with a positive reading signaling above average growth and negative reading signaling below average growth.

The Index reading in September jumped to 0.47 after August’s first negative reading since January 2014 has seen positive readings in 7 of the past 9 months, with one of the months, January, being in the middle of an abnormally harsh winter. The indicator CFNAI-MA3 is a three month moving average that reduces volatility in the CFNAI headline reading. The reading for September was 0.25, up from August, indicating that the economy was growing above historical trend, for the seventh straight month. All figures were above trend in September except for Personal Consumption and Housing, which has exceeded nearly eight consecutive years (currently at 93 straight months) of below trend growth. Recent data releases involving increased employment and decreased unemployment claims contributed to the positive reading. The last above average reading was in December 2006, (Fig. 6). Since GDP equals consumer spending plus investments plus net exports plus government spending, this reading depresses potential GDP growth. The CFNAI is a leading indicator for steel consumption and historically there has been a firm relationship between the CFNAI index and steel supply up to the start of the recession. The CFNAI experienced a healthier recovery than “Long Product” steel supply. The construction sector has yet to experience the growth typically seen in the recovery after a recession; however, the gap seems to be closing, more than five years after the recovery began, (Fig. 7).

Fig 6 

Fig 7


Steel Demand Indicators: Table 6 is a snapshot of the market situation on 11/06/14. Of the twenty seven indicators under consideration, the present situation of twelve are now positive by historical standards, nine are neutral and six are negative. This represents a net change of plus one positive and minus one neutral. The change was in the Chicago Fed National Activity Index, (CFNAI) which we changed from neutral to positive on the basis of a + 0.25 reading. Any value > 0 indicates that the economy is expanding faster than the historical norm. This sounds like a small value but 0.75 is the highest this index has ever been since January 2000. There were no other directional changes in the present situation of the 27 indicators. 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. There was a net increase of one positive and a net decrease on one negative trend since last we published on October 16th. The overall trends are very good with 21 of 27 indicators moving in the right direction. In the General economy section both the CFNAI and Consumer Confidence reversed direction and trended positive. On Monday this week the Federal Reserve released the October update of its Senior Loan officer Survey in which there was a decrease in the number of banks reporting a demand increase for commercial and industrial loans. Consequently this trend has reversed and become negative. There were no directional changes in the trends of long products, construction or manufacturing. Capacity utilization and the supply of long products continued their strong positive trend. The growth of total construction as reported by the Commerce department on Monday slowed from 4.3% in August to 3.2% in September on a three month year over year basis. The ISM manufacturing index also reported on Monday exceeded expectations and came in at 59.0 with a 3MMA of 58.2, an increase of 0.6 from the September 3MMA. 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 6

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