Thursday
Feb052015

Weeky Market Update - February 5, 2015

Gross Domestic Product 4th Q 2014 1st Estimate: The Bureau of Economic Analysis, (BEA) released the first estimate of Q4 2014 Annual Revision of the National Income and Product Accounts last Friday.

The annualized growth rate in the 4th Q disappointed economic pundits by coming in at 2.64% after increasing by almost 5.0% in Q3. GDP is measured and reported in chained 2009 dollars and in Q4 was estimated to be $16.312 trillion. The calculation is slightly misleading because it takes the Q over Q growth and multiplies by 4 to get an annualized rate. This makes the high quarters higher and the low quarters lower. Fig. 1 clearly shows this effect. The blue line is the trailing 12 months growth and the black line is the headline quarterly result. On a year over year basis GDP was 2.48% higher in the 4th quarter than it was in Q4 2013 and that result is in line with performance since Mid-2010. Q1 of 2014 had negative 2.21% growth due to the appalling winter in the North East U.S. and the 2nd and 3rd quarter results which were very strong were likely playing catch-up. The fact that Q4 was very close to the year as a whole tends to support that view. Fig. 2 shows the headline quarterly results since 1990 and the IMF forecast through 2018. Taking 2014 as a whole makes the IMF forecast look reasonable with a quarterly growth rate of 3.09% forecast for 2015. Fig. 3 shows the change in the major subcomponents of GDP. Comparing Q4 with Q3 there were major changes in the subcomponents. Personal consumption contributed 2.87% to the growth meaning that all other major components were slightly negative in total. Personal consumption includes goods and services, the goods portion of which includes both durable and non-durables. Presumably personal consumption is being driven by low gas prices. Net exports were the major negative and contributed – 1.02% to the total. This negative contribution can be expected to worsen as the U.S. dollar strengthens. Government expenditures also yielded a negative growth of - 0.40%. The contribution of fixed residential investment was almost unchanged at 0.13% but the contribution of non-residential construction declined from 1.1% in Q3 to 0.24% in Q4. In the 4th Q, personal consumption accounted for 68.14% of total economic activity, up from 67.87% in Q3. Inventories which had contributed only 0.03% in Q3 contributed 0.82% in Q4. 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. 4 shows the breakdown of the $16 trillion economy.

Fig 1 

 


Fig 2

Oil Price and the Economy: Portland Cement Association (PCA) economists expect that the net effect of low oil prices will result in a 0.2% increase in U.S. GDP in 2015 rising to a 0.3% impact in 2016. In addition PCA portends that net U.S. jobs will increase by 220,000 in 2015, and slightly more in 2016.

There is a considerable lag from the onset of lower oil prices to an upsurge in construction activity. In the case of non-residential construction, this lag is estimated to be 23 months. A longer lag of 35 months is anticipated for government construction projects. In short, the influence on construction activity from lower oil prices will be muted in 2015.

The impact is expected to be more evident and immediate oil producing states. Oil companies idled more than 94 rigs last week, the largest reduction since 1987. According to Bloomberg over 352 oil rigs have been idled over the past eight weeks leaving approximately 1,220 active rigs, (Fig. 5). Capital spending on construction projects is being slashed. Collectively Chevron BP and Shell are expected to trim project spending by some $60 Bn this year. This cut will be largely offset by the anticipated $50 Bn extra funds that consumers will have to spend from lower energy expenditures, however early indications are that much of these bonus dollars are being used to pay down debt or being saved. The states at the greatest risk of economic slow-down include: Wyoming, Alaska, Oklahoma and North Dakota. The wages in these four states carry 10 to 15% of total state wages, while Texas represents 9.0%, while Louisiana accounts for 6.5%.

Another impact of lower oil prices is the potential for continued low interest rates. There has been much talk in the media about the FED raising interest rates mid-year. However, the FEDs inflation rate target is 2%, a number that has yet to be breached since the recession ended. Low oil prices reduce inflationary pressure, thereby reducing the likelihood that interest rates will be increased this year. A delay in the inevitable rise in the interest rate environment would help drive business and consumer spending while keeping mortgage payments low.

Oil prices have jumped over the past few days, (Fig. 6). Brent has rebounded about 17% to $54 (as of Thursday 02/05/2015). This surge in oil prices can largely be attributed to the refinery strike currently underway. “Walkouts have been called at nine plants, including seven refineries, with a combined 10% of U.S. refining capacity. The strikes were the first since 1980 in support of a nationwide pact that would cover 63 refineries and 30,000 workers”. – Reuters.  Fuel prices will increase as a result of this situation, especially if it drags on. According to Bloomberg, the petroleum sector believe that the run-up in prices is only temporary that a glut of oil supply will be in-place for several years keeping oil in a $40 to $60 range during that timeframe.

Fig 5

 

 



Fig 6

 

Imports. Long and Flat and Semi-finished through January 2015. Licensed data for January was updated on February 3rd through the Steel Import Monitoring System of the U.S. Commerce Department. Total rolled product licensed imports in the month of January were 2,759,995 short tons which was over 800,000 tons higher than January last year but down by 52,000 tons from December.

Fig. 7 shows the 3MMA through January licenses for long, semi-finished, flat products. Long products declined in November, December and January with a slightly accelerating trend. Flat includes all hot and cold rolled sheet and strip plus all coated sheet products including tin-plate plus both discrete and coiled plate. The import surge took a breather for flat rolled in December and the downward trend accelerated in January. Semi-finished began to decline in November and the downward trend also accelerated through January. Fig. 8 shows the trend for long products since January 2011 and even as three month moving averages the trends of rebar and wire rod are very erratic. The good news is that all products were down in January. Table 1 provides an analysis by major product group and by long products in detail and compares the average monthly tonnage in the latest three months through January with both the same period last year, (y/y) and with three months through October, (3M/3M). Semi-finished slabs and billets were down by 26.7% 3M/3M and up by 1.4% y/y. The total tonnage of hot worked products averaged 2,798,155 tons per month in three months through January, up by 40.4% y/y but down by 5.0% on a 3M/3M basis. On the same basis total flat products were up by 61.1% and down by 6.2%, plate was up by 120.7% and up by 8.4%. Table 1 shows the tonnage and percent change for individual long products for which the total average monthly tonnage in three months through January increased by 57,683 tons or 12.0% year over year. On a 3M/3M basis, total long products were down by 10.4% and all individual products were down, ranging from light shapes down by 44.0% rebar down by 5.2%.

Fig 7 

 

Table 1

Institute of Supply Management Manufacturing and Non-manufacturing Indexes: The ISM manufacturing Index fell in January from 55.1 to 53.5, (Fig. 9). The ISM index is above the expansion benchmark, greater, than 50, for the 20th consecutive month. The 3MMA has dipped over the past three months from October’s three year high of 57.3. Production, New Orders, and Employment all fell in January, however, Inventories rose back above 50 to 51.0, up 5.5 points from December’s unusual decline. January Employment has fallen even as the economy added 866,000 in the last quarter of 2014. The latest jobs figures comes out Friday at 8:30 AM. According to the Manufacturing ISM Report on Business, the manufacturing sector grew for the 20th straight month; the overall economy expanded for the 68th consecutive month – more than five years. (http://www.ism.ws/ISMReport/MfgROB.cfm).

The ISM Nonmanufacturing Index inched up in January from 56.5 to 56.7, ending the two month skid. The 3MMA has dipped for the fifth straight month down to 57.3. Business activity rebounded from December with a reading of 61.5, up 2.9 points from December. New orders also inched up in January. Employment figures dropped from 55.7 to 51.6, the lowest reading since April 2014. Both Manufacturing and Nonmanufacturing Indices experienced drops in employment for January. Perhaps this could be foreshadowing for the January jobs release.

Fig 9

Global Business Confidence: Business confidence has been volatile since the beginning of 2015, starting the year off at 34.3 and currently at 42.1, (Fig. 10). Results have varied over the past five weeks. North American business confidence has remained flat around the 47- 48 range since the middle of December, with December 26th reading reaching an all-time high of 48.5. Results were mixed across the board for business conditions, however most appeared to move in the positive direction. Financing ability hit a record high this week with a reading of 53.3, 4.9 points higher than the week before. Inventory investment intentions rose in January. This is typical for manufacturing firms who deplete their inventory by the end of the year and replenish in January. Six month expectations inched up this week but were down 9 points since the middle of December, in part due to the global oil glut that has decimated oil prices. Typical consumers may see cheaper gas, however, economies that rely on strong oil prices will have to cut their budgets, weakening their currencies, which negatively affect U.S. exports. Inflation is still well below the 2% stable prices mandate that the Federal Reserve dictates as a healthy economy (http://research.stlouisfed.org/fred2/series/CPILFESL).

Fig 10

Housing Inventory & Pricing: U.S. foreclosure filings, (default notices, repossessions and auctions) for year ending 2014 were revised downward to 1,117,000, 18% lower y/y and posting the lowest annual nationwide filings total since 2006, (Fig. 11). Daren Blomquist vice president at RealtyTrac was quoted saying, “The U.S. foreclosure numbers in 2014 show a foreclosure market that is close to finding a floor and stabilizing at a historically normal level. But a recent surge in foreclosure starts and scheduled foreclosure auctions in several states in the last few months of 2014 indicate that lenders are gearing up for a spring cleaning of deferred distress in the first half of 2015 in some local markets.”

Data released January 27th reported the S&P/Case-Shiller Home Price Indices and reflected possible deceleration of U.S. home prices. Gerdau tracks the 20-City composite index which observes pricing of 20 major U.S. metropolitan statistical areas (MSAs). Fig. 12 shows the 20-city composite index overlaying U.S. foreclosures. November y/y growth of the seasonally adjusted 20 city index was up 4.3%, flat with October’s 4.5% y/y growth. The national index posted 4.7% y/y growth, also flat with October.

Table 2 presents the S&P/Case-Shiller 20 city home price index sorted on annual percentage growth, strongest to weakest. All cities recorded both y/y and 3 month y/y increases. The strongest growth was in San Francisco, up 8.9% y/y, followed closely by Miami up 8.6%. Generally the warmer climate cities are slowing the stronger pricing gains with the exception of Denver which was up 7.5% y/y.

Fig 11

Table 2

Portland Cement Consumption data is two months in arrears (data is collected by the U.S. Geological Survey). Consumption increased 8.8% nationally three months year on year ending November. All regions posted 3 month y/y increases. The largest increase was in the West South Central, up 16.6% 3m, y/y, followed by the East North Central which was up 11.7%. The lowest percentage increase was in the West North Central at 2.7%, followed by the Pacific region up 4.4%, 3m y/y, (Fig. 13).

Fig 13

Steel Demand Indicators; Table 3 is a snapshot of the market situation on 2/5/2015. 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 twenty seven indicators under consideration, the present situation of twelve are positive by historical standards, nine are negative and six are neutral. This was an increase of one negative and a decrease of one neutral since the January 22nd update. The change we made was to the capacity utilization of the long product mills which had an extreme decline in November. Here is a comparison of November with October for recent years: 2010 up 4.6%, 2011 down 5.2%, 2012 up 2.3%, 2013 down 11.3% and 2014 down 18.2%. We hoped that the December result would bounce back but it came in at 3.6% below December last year. The 3MMA of capacity utilization in December declined to 72.5% from 76.8% in November. There were no other changes in the present situation analysis. 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 latest facts available as of today’s date. Overall there was an increase of one negative trend during the last two weeks of data releases. The Chicago Fed National Activity Index reversed direction and trended negative in December however the actual value still shows an economy expanding faster than the historical norm. All other indicators continued to trend as they did in December’s data releases. We should qualify that statement by saying that some trends are compared y/y, others are q/q. The result for 4th GDP released last week was down q/q but because of the very erratic nature of this statistic we prefer to consider y/y which was up from Q4 2013. The other data point worthy of note in the latest releases was consumer confidence as reported by the Conference Board last week. Consumer confidence is now the highest it’s been since August 2007. (Explanation of Indicators).

Table 3

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