Weekly Market Update - May 7, 2015

Construction-Put-In-Place (US Census Bureau) : Total CPIP posted an increase of 6.7%, 3 months y/y and 4.9%, 12 months y/y. Every project category recorded gains except State & Local Power which declined 4.9% y/y, (Table 1). Non-residential building expenditures rose 18.1%, 3 months y/y to $86.4 Bn strengthening from the annual growth rate of 12.9%. Single family residential also recorded stronger numbers for 3 months y/y (13.8%) besting the 12 month y/y metric (11.5%) resulting in positive momentum going forward. Despite the 39 consecutive months of growth averaging 19.2% y/y, (3 month y/y basis) expenditures on housing remains depressed by historic standards, still lower in constant 2010 dollars than the mid-1990s, (Fig. 1). Housing starts at this point in the recovery, seven years after the recession sending should be in the neighborhood of 1.5 million units on an annual basis. The latest reading is a little less than one million.

(Table 2) breaks down non-residential construction (NRC) sub-categories. On a three month y/y basis every category except public safety and religious structures was positive in the March data. Private expenditures are up a solid 23.4%, 3 months y/y and 17.5%, 12 months y/y in an encouraging sign. State and Local expenditures were also positive albeit at much lower level of 4.9% and 3.1% respectively. Comparing Private and State & Local expenditures over a long period of time illustrates some interesting findings, (Fig. 2). Private expenditures started to decline long before the official onset of recession and continued to fall long after the recession was declared ended. Private expenditures bottomed and began to increase in 2011. State & Local expenditures on the other hand continued to rise gradually through the recessionary period, (American Recovery and Reinvestment Act of 2009), then started to taper off once the Private sector reversed course.

Evidence of strength in the manufacturing sector of the economy is evident based on the infusion of cash into manufacturing buildings, up 39.5%, 3 months y/y and 24.4%, 12 months y/y. (Fig. 3) shows the rapid rate of growth in manufacturing buildings which began in the 2012 – 2013 period before surging to ten consecutive months of double digit (3month y/y growth), in 2014 and thus far in 2015.

(Fig. 4) takes a look at aggregate infrastructure growth which fell sharply in 2010 and 2011 before plateauing in 2012 and 2013 before starting to rise again in 2014. The acceleration in y/y growth has thus far continued into 2015.

Table 1

Table 2

Regional and State Job Creation in Q1 2015: The states compile their employment numbers independently of the Feds then both are reported by the Bureau of Labor Statistics. The results are very close. In the last nine quarters since Q1 2013, the Feds reported total job creation of 5,992,000 and the States reported 5,895,000.

There were some dramatic changes in regional job creation in Q1 2015 which we conclude were highly influenced by the decline in the price of crude oil and the continuing decline in the price of natural gas. The South central region, (TX, LA, AR and OK) which had the highest rate of job creation of all regions in Q4 2014, crashed in Q1 2015 and had a net loss of jobs. The East South Central region, (AL, MS, KY and TN,) also had negative job creation in Q1. (Table 3) shows the history of quarterly job creation by region for the last four years. The North Central region, (IA, KS, MN, MO, NB, ND and SD), and the Pacific region, (CA, OR and WA) had an increase in Job creation in Q1. All other regions had a weaker performance but did have a net positive result. Drilling down to the state level reveals some notable changes; New York State created 34,000 of the 36,000 jobs in the North East Region, Florida and Georgia created 70,000 jobs of which 57,000 were in Florida, Michigan and Ohio between them created 46,000 jobs, Texas gained 4,000 jobs but Louisiana and Oklahoma lost 13,000 and 9,000 respectively which put the South Central into negative territory, North Dakota with a loss of 2,000 jobs was the only state in the North Central region to loose positions. All states in the Mountain and Pacific regions added jobs in Q1.

The regions have fared very differently since the pre-recession high of 1st Q 2008 and since the low point of 4th Q 2009. There are now 3,261,000 more people employed than there were immediately before the recession but of that number over a third were created in the South Central, (TX, LA, AR and OK). The East North Central, (IL, IN, MI, OH and WI) is almost at break-even but the East South Central, (AL, KY, MS, and TN) have still not recovered all the jobs lost during the recession, (Table 4).

Table 3

Table 4

Auto Sales and Production: March vehicle sales in the US increased strongly to 17.15 million units on a seasonally adjusted annualized basis, up from 16.23 million units in February. The March 2015 sales pace was 4% higher than the March 2014 pace. Cars had the greatest growth from 7.2 million units in February to 7.7 in March. Light trucks grew from 9.0 in February to 9.4 million in March. Sales of domestic product grew from 12.9 to 13.4 million, imports from 3.4 to 3.7 million.

Total light vehicle, (LV) production in NAFTA in March, not seasonally adjusted, was at an annual rate of 18,859,176 units, up by 2.7 million from February or 17.0%. On a rolling 12 months basis y/y LV production in NAFTA increased by 4.0% through March. 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. 5). On a rolling 12 months basis y/y the US is up by 3.8%, Canada is down by 3.6% and Mexico is up by 10.7%, (Table 5). The US has gained production share in the most recent 3 ½ years, but that gain has flattened in the last 18 months. Currently Mexico is attracting more investment by foreign automakers than the United States. Toyota Motor Corp. has announced plans for a new $1 Billion plant in central Mexico to produce 200,000 Corollas a year and about a dozen major automakers have expanded in Mexico or announced plans to open new plants. With lower wages and free trade agreements, Mexico is becoming increasingly attractive for auto expansions — and nearly 80 percent of all vehicles built in Mexico are exported. Last month, Volkswagen AG said it will make a $1 billion investment to expand a plant in Mexico to build its next generation Tiguan SUV. In December, General Motors Co. said it will invest $5 billion in Mexico over six years and will add 5,600 new jobs. GM said the investments will "help establish GM as Mexico’s No. 1 vehicle exporter.”

The mix of light vehicles is very different by country, (Fig 6). The percentage of autos in the Mexican mix in the last three months was 60.4% but only 36.5% in the US and 41.9% in Canada.

Fig 5

Table 5

US Preliminary Imports (SIMA): Preliminary count of US long product imports rose 21% in March, importing 653,000 tons (kt). The second highest level of imports since Gerdau began tracking import data in 2008. Licenses for March totaled 730kt, leaving 77kt of unutilized licenses that may have arrived in April and could show up in May.

Imports of wire rod fell 10% m/m, with Canada and Turkey continuing to provide the majority of imported wire rod. In spite of the m/m decline, YTD imports rose 6% y/y. MBQ imports rose 8% m/m and was up 17% y/y, while SBQ imports rose 31% in March, and was up 3% y/y. Light angles and channel deliveries fell 14% in March. Canada and Mexico, our NAFTA trading partners, provide the majority of tonnage as YTD imports totaled 43kt. A y/y increase of 14%, contributed to large February shipments from Turkey. Heavy structural shapes, including beams fell 5% m/m, yet YTD rose 94%. Reviewing preliminary imports, beam shipments rose 33% m/m, thus the angle and channel portion of heavy structural tonnage fell. YTD beam imports, plus preliminary count, totaled 181kt, a y/y increase of 133%. The majority of March’s beams originated from Korea and Taiwan, as well as increased tonnage from Russia. Russia requested only 5,200 tons of license in March, yet due to application rules, had until the 10th of April to apply for additional March license to import. As of April 28th preliminary count by the US international trade commission, Russia had shipped an additional 6,700 tons of beams. Rebar preliminary imports rose 65% m/m, importing 257kt for the month, and essentially doubling YTD total tonnage for this product. Year on year rebar imports were up 22%, as 58kt of unutilized licenses remained. Turkey held 79% of the rebar import market, shipping 205kt in March, yet leaving close to 50kt of unused licenses, (Table 6).

Table 6

Commercial Property Price index: The Moody’s/RCA CPPITM uses advanced Repeat-Sale Regression (RSR) methodology of qualified repeat sale observations to measure price change in commercial real estate. This state-of-the-art, academically published and vetted econometric methodology provides rigorous, objective and replicable information about the movement of commercial property prices over time. Moreover, the RSR approach produces quality controlled property price indices and is widely acknowledged as the most accurate way to track real estate price movements.

The National CPPI 3MMA reached a new high of 189.26 in February, up 14.4%, 3 months y/y (Fig. 7). Retail which lagged behind the percentage y/y growth of all of the other sub-indexes made a pronounced come-back so far this year, rising double digits in January and February to almost fall in line with the National all property average, (Fig. 8).

Offices in the commercial business district (CBD) and apartment sub-indexes continued to outperform core commercial, industrial and suburban offices. The CBD office price sub-index has averaged 6.9% y/y growth since January 2010. Comparatively the suburban office growth averaged 4.6% over the same period (Fig. 9). However, over the past three months suburban the office growth rate has accelerated to average 17.0% vs. 14.4% for the CBD indicating a shift in demand. Despite the recent acceleration, suburban office space its sub-index is still down 12.5% from to its pre-recession peak level.

Referencing the Real Capital Analytics quarterly newsletter, 2015 is off to a great start with quarterly sales up 45% y/y on volume of $129 Bn. The office and apartment sectors had nearly identical sales for the quarter at $33.5 and $33.0 Bn while the industrial sector recorded the strongest y/y performance with a gain of 95%. Much of the capital inflows are from foreign investors with long term horizons betting that the future growth of US economy is a safer but in a world of uncertainty.

Underwriting standards today remain tighter than 2007 when loan to value (LTV) of commercial loans floated around 70%. Over the last two quarters LTVs have been right at 65%, so not as highly leveraged as the ‘hey days’ of the mid-2000s.

Fig 7

Fig 8

Federal Reserve Senior Loan Officer Opinion Survey on Bank Lending Practices: The Q2 2015 February Senior Loan Officer Opinion Survey on Bank Lending Practices was released on May 4th. This survey addresses changes in the standards and terms on, and demand for, bank loans to businesses and households on a quarterly basis and is based on the responses from 76 domestic banks and 23 US branches and agencies of foreign banks.

The April survey indicated that demand for commercial and industrial (C&I) loans from both large, (> $50MM revenue) and small firms, (< $50MM revenue) was almost unchanged. (Fig. 10 and Fig. 11) There was a minor tightening of lending standards to small firms to which a net 1.0% of banks reported an easing of standards, down from 5.7% in Q1 2015. What this means for example is that the number of banks reporting an easing of standards to small firms was 1.0% higher than the proportion reporting a tightening of standards. In reality most banks are not changing their standards. There was almost no change in the number of banks reporting a change in demand for construction and land development loans, demand is at the bottom of the range that has existed since mid-2011. The net percentage of banks reporting an easing of standards for construction loans decreased from 2.9% to 2.0%, (Fig. 12). Demand for prime real-estate mortgages has been extremely erratic and seasonal for two years. In Q1 2015 a net 17.1% of banks reported a decline in demand as a net 31% reported an increase in Q2 2015. (Fig. 13).

The implications of this report are reasonably good for steel people. Banks are not changing their lending practices for C&I loans or for CRE loans. Demand for C&I loans is stable and is increasing for CRE business. A net 9% of banks indicated an increase in demand for auto loans and a net 9.6% reported an increase in demand for credit card loans.

Fig 10

Fig 11

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