Weekly Market Update August 7, 2014

Construction Put-in-Place, U.S. Commerce Dept.: Total construction was up 7.3% y/y ending June 31st to 568.1 Bn in constant 1996 dollars. Private construction was up 10.7% y/y, while public construction contracted by 1.0% y/y, (Table 1). Single family housing rose by 18.5% y/y, but was up just 9.3%, 3 months y/y indicating a bit of a slowing trend. Charting private construction excluding single family residential, (Fig. 1) presents a “reality check” vs. history. Despite decent y/y percentage growth the expenditure level barely matches that seen in the mid-1990tys.

Non-residential construction (NRC) grew by 4.9% y/y and has accelerated to 7.0%, 3 months y/y. Private NRC increased by 9.9% y/y as state and local construction fell by 4.5% over the same timeframe, (Table 2). Apartments (>4 stories) continued to increase at a rapid pace rising 34.9% y/y, slowing marginally to 31.1% on a 3 month y/y basis. Office construction is starting to accelerate, up 24.4%, 3 months y/y vs. a 14.2% y/y increase.

Highway pavement spending at the State and Local level has been in decline for since the onset of the great recession, (Fig. 2) presents State and Local highway pavement expenditures on a rolling 12 month basis. Year on expenditures (in constant 1996$) have been subject to 48 consecutive monthly declines on a 12 month rolling basis. 

Table 1

Table 2

Fig 2

Auto Sales and Production. U.S. light vehicle sales declined slightly in July from June’s high level but at a seasonally adjusted annual rate, (SAAR) of 16.5 million units were still very strong. Sales have now exceeded 16.0 million units, SAAR for five straight months. Sales in July of autos and light trucks were 8.0 and 8.5 million units respectively, autos declined by 300,000 and light trucks by 100,000 from the June result. Total light vehicle production in NAFTA in June was at an annual rate of 17,575,000 units, down by 2.7% from May but still the third best month of the year. Medium and heavy truck production in June was at an annual rate of 470,000 units up from 447,000 units in May. On a rolling 12 months basis y/y light vehicle production in NAFTA increased by 5.3% and is now well above the pre-recession peak, (Fig. 3). On this basis the U.S. is up by 7.2%, Canada is down by 0.7% and Mexico is up by 3.6%, (Table 3). For NAFTA as a whole on a rolling 12 month basis year over year, light truck production is up by 10.7% and autos are down by 1.2%. A time comparison such as this is very strong evidence of a long term shift in consumer preference, probably driven by the crossover sub-set of light trucks. Ward’s Automotive reported last month that light vehicle inventories declined by one day of sales in June to 59 days. Inventories of the Detroit 3 also declined by one to 71 days, the Asian manufacturers were unchanged at 49 days and the Europeans declined by six also to 49 days.

Fig 3

Employment Situation: Net job creation for July totaled 209,000, and has been above 200k a month for the past six months; the best six month clip since before the recession. The unemployment rate ticked up to 6.2%. Labor Force Participation remained flat at 62.9, hovering around the lowest percentage on record dating back to 1980. The employment to population ratio has stayed constant at 58.9 since the end of the recession in 2009, (Fig. 4).

New employment claims have been hovering around the 300k mark, a benchmark that normally indicates sustained economic growth. This type of momentous economic activity would indicate an increase in interest rates, however, short and medium term inflation are anticipated to remain below the 2% target for the foreseeable future. The long term unemployed (six months or longer) and involuntary part time workers have decreased only slightly and is still above prerecession levels which leads to a significant amount of slack in the labor market.

Unemployment by duration tracks the length of unemployed persons in the United States into four categories: less than 5 weeks, 5-14 weeks, 15-26 weeks, and 27 and higher. The long term unemployed, 27 weeks or more, has fallen in recent months but is still far above the historical normal percentage, which is below 20% of all unemployed. This group also lead the unemployed by duration as a percentage of all unemployed, (Fig. 5). Currently, short term unemployed numbers have increased while the longer term numbers have decreased. This could be an indication that more people have entered the workforce viewing the marketplace as favorable; on the contrary, it could be viewed that the long term unemployed view the marketplace as poor with no job opportunities.

Fig 4 

Fig 5

ISM Manufacturing Index: The Manufacturing Index rose to 57.1 in July, the highest figure since Q2 2011. A value greater than 50 signals a growing economy. New Orders, Production, and Employment grew in July, furthering the expansion in the manufacturing sector of the economy. Employment grew the most, with a 5.4% increase from 52.8 to 58.2. According to the Manufacturing ISM Report on Business, 17 of 18 manufacturing industries grew in July (Report on Business). The preliminary report on Q2 GDP indicated that the economy grew at a 4% pace, providing more evidence that the Q1 drop of nearly 3% was primarily a product of the harsh winter, (Fig. 6).

Fig 6

Housing Starts, Foreclosures, Inventory and Pricing: Table 4 presents housing permits and starts for the entire U.S. and by region. Total permits in June (3MMA), were 1,009,000 just 1.3% higher than the same period in 2013. Starts in June (3MMA), were nearly identical to permits at 1,007,000, however these were up 16.5% over the 2013 level of 865,000. Almost 50% of the starts are in the South with the next biggest region being the West. Permits in the South have fallen 2.0% for single family (SF) and are down 3.9% for multi-family (MF) but starts are up 8.3% for SF and 30.9% for MF. Permits and starts are showing larger percentage increases in every region of the country as demand for apartments continues to remain strong as vacancy rates stay low, currently 4.1% in Q2 nationally per REISS. The ratio of SF to MF has changed dramatically in recent years. In the years between 2000 and 2007, the ratio ranged from four to six SF to one MF. In the recession years this ratio fell to two before skyrocketing north of seven in late 2010. Since that time the ratio has continuously fallen and now hovers around two and is still declining, (Fig. 7). This is a remarkable shift in housing patterns. A significant contributing factor is the slow job creation and low wage growth thus far into the recovery. First time buyers, generally younger people are choosing to rent for a myriad of reasons to include: Having large student loans to be repaid, insufficient down-payment, tight loan underwriting standards and the memory of the 2008/9 housing crash.

Foreclosure continue to decline, now at 107,194 are comparable to the average level in 2006 (104,927). Prices continue to climb, reaching 170.74 on the Case-Shiller NSA index in May. This compares well with the 12 month period encompassing the last nine months of 2004 and the first three months of 2005, (Fig. 8). Months’ supply of new and existing housing is running at 5.5 months and has been trending up since the beginning of the year. The generally accepted rule of thumb is that house construction remains active at inventory levels less than six months, (Fig. 9).

Table 4

Fig 7
Fig 8

Steel Demand Indicators; Table 5 is a snapshot of the market situation on 08/06/14. We have been performing this analysis twice a month for over four years. The last report on July 24th was the first time that there had not been a change in either the evaluation of the present situation or in the direction of trends and this has repeated in this current update. The present situation of 10 / 27 indicators is good with 7 still depressed, 22 of the 27 indicators are trending in a positive direction. Overall this is a very good report for future long product demand. There has been a change in the magnitude of some trends that are worthy of note since we last published. The first estimate of the growth of GDP in Q2 was a pleasant surprise and raised the year over year growth rate from 1.55% to 2.43%. Consumer confidence accelerated in the July report from the Conference Board. The supply of long products surged by 799,000 tons in 3 months through June compared to 3 months through May y/y. Manufacturing employment grew by 178,000 y/y compared to the May result of 130,000.

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 5

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