Weekly Market Update - April 7, 2016

Construction Put-in-Place: Total CPIP continued to record solid growth in February, up 14.8% y/y with a slightly weaker 12.4%, 3 month y/y. The private sector posted 18.0% growth y/y and 14.6%, 3 month y/y, while the State and Local sector grew by a more modest 8.2% y/y and 7.3%, 3 months y/y. Single family residential recorded strong growth of 19.3% y/y, falling to +14.2% on a 3 month y/y comparison, (Table 1). Highways and street saw a 10.4% y/y increase and was the only project category to record a stronger 3 month y/y number (18.3%), resulting in positive momentum of +7.9%. Several other infrastructure project categories are showing weakening performance as the 3 month y/y growth was negative in February. These include Sewage & waste (-0.9%), Water supply (-5.1%), Power (-14.0%) and Conservation (-21.6%). Fig. 1 charts total infrastructure from 2005 to present in non-seasonally adjusted, constant 2009 dollars. Expenditures have been rising for 44 consecutive months since mid-2012, up 8.5% y/y ending February.

Non-residential construction also continued to record impressive growth, up 19.3% y/y, declining to 14.2% on a 3 month y/y basis. The private sector surged 24.0% y/y, falling to 16.5%, 3 month y/y, while the State and Local sector grew by a more modest 8.2% y/y and 7.5%, 3 months y/y, (Table 2). Education was the project category with the largest expenditure for the year ending February at $95.2 Bn up 9.7% y/y and up a stronger 11.3%, 3 months y/y. This was one of two project categories with positive momentum (+1.6%). Education construction expenditures fell on a y/y percentage basis for 24 months from January 2010 through December 2011, then increased for the next 12 months before once again declining for 18 months until April 2014. Since then expenditures have steadily increased and have now been positive for 23 months in row reaching a 9.7% y/y growth rate in February, Fig. 2. The increased spending on schools is a clear indication that State and Local tax revenues have improved along with enhanced wealth of and confidence of the workforce Manufacturing building construction has slowed to a still respectable 13.5%, 3 month y/y growth rate after surging 41.2% over the past 12 months. Fig. 3 illustrates the strong 55 consecutive month y/y percentage growth run that manufacturing buildings have enjoyed after the negative growth run that ended midway through 2011. Construction is growing strongly and infrastructure expenditures will expand in the next five years as Fixing America’s Surface Transportation Act (FAST) funds begin to flow.

Table 1

Fig 1

Institute of Supply Management Manufacturing Index: After eight months of consecutive declines with the last five readings below the 50 threshold for expansion, the ISM manufacturing index increased to 51.8 (+2.3%), in March. However when looked at on a 3MMA basis, the index stood at 49.83 and has been below 50 for four months in a row, (Fig. 4).

The New Orders component surged 6.8% to 58.3 m/m in an encouraging sign that the manufacturing economy appears to be on the mend. Meanwhile the Production sub-index came in at 55.3, the Employment sub-index fell m/m by 0.4% to 48.5 and the Inventories component moved up 2% to 47. Several firms in multiple industries expressed concern that with the low unemployment rate, qualified workers are getting hard to find necessitating running a lot of overtime. This will likely boost wage pressure and thereby expand the labor force participation rate.

Moody’s expressed caution over the near-term. Durable goods orders fell 2.8% in February as core capital goods orders dropped 1.8%, reversing some of January’s 3.1% gain. Low energy prices and an appreciating U.S. dollar are cutting into orders. Meanwhile, core capital shipments fell 1.1%, and January is now shown to have dropped 1.3%, (revised from the previously cited 0.4% drop). This portends a decline in real equipment spending this quarter.

Fig 4

Institute of Supply Management Non-Manufacturing Index: The non-manufacturing index increased by 1.1 point to 54.5 in March. Business activity jumped 2 points to 59.8, New orders were up 1.2 points to 56.3, Employment grew 0.6 to 50.3 and Supplier deliveries moved-up 0.5 point to 51.0. This indicates that the broader economy is gaining strength and is weathering low energy prices and a tightening financial market. It now appears probable that we will see stronger GDP growth in subsequent quarters after the dismal Q1 annualized result of just 1.7%, (Fig. 5).

Fig 5

Currency Report: The U.S. dollar has declined against the monthly Broad index (also known as the “Dollar index”, a trade weighted basket of 26 currencies), after peaking in January at 101.231, it ended March at 97.813, a 3.4% decline. A falling dollar is generally good for the steel industry as it makes it less attractive for exporters to send steel to the US market. Conversely it helps US firms become more competitive on the world stage. Fig. 6 charts net imports (red line, left axis) against the US Broad index (blue line, right axis, inverted scale). The correlation coefficient is relatively strong at 0.731. It would be much higher except for the tremendous amount of volatility on imports from one month to the next. Table 3 presents currencies of countries that export steel to the US. The green color denotes that a currency is strengthening, red weakening. Note that virtually every currency has strengthened against the dollar in the last month as well as the seven days. Much of this can be attributed to the recent FED decision not to raise interest rates at its March meeting.

Fig 6

Net Job Creation by Industry through March 2016: A total of 215,000 jobs were added in March, down from 245,000 in February but up from 168,000 in January. The three month moving (3MMA) of gains through March was 209,000. Monthly job gains have averaged 225,000 per month in the fifteen months since and including January 2015, (Fig. 7).

Table 4 slices total employment into service and goods producing industries and then into private and government employees. Total employment equals the sum of private and government employees. It also equals the sum of goods producing and service employees. Most of the goods producing employees work in manufacturing and construction and the major components of these two sectors are also shown in Table 4. The bad news in March was that job creation in manufacturing industries was terrible with a 29,000 loss which was the worst result since the recession. Manufacturing employment is now lower than in January last year. On the same day, (April 1st) that this jobs data was released, the ISM released its manufacturing update. The ISM report was excellent and returned to expansion for the first time since August last year. In the ISM report every subcomponent improved except employment which deteriorated. The implication is that productivity is in fact playing a part in the dismal manufacturing employment result.

Construction has leapt ahead of manufacturing as a job creator and added 37,000 jobs in March for a total of 371,000 in the 15 months since and including January 2015. Construction has added 1,172,000 jobs and manufacturing 838,000 since the recessionary employment low point in February 2010, (Fig. 8). Based on the total construction analysis that we reported in our CPIP update, we assume that construction jobs will continue to expand vigorously.

The official unemployment rate known as U3, decreased from 5.5% in May last year to 4.9% in January and February before increasing again to 5.0% in March. This number doesn’t take into consideration those who have stopped looking. The more comprehensive U6 unemployment rate decreased from 11.3% in January 2015 to 9.7% in February this year before increasing to 9.8% in March, (Fig. 9). U6 includes workers working part time who desire full time work and people who want to work but are so discouraged that they have stopped looking. The differential between these rates was usually less than 4% before the recession but is still 4.8%. The good news is that the gap is slowly closing.

The employment participation rate is widely quoted in the press as going nowhere. In March 2016 the rate was 63.0% which was the same as January 2014. We’re not sure that we understand what this is a percentage “of” because of the multiple descriptions of the labor pool. Another measure is the number employed as a percentage of the population which we think is much more definitive. In March this measure stood at 59.9% which was up from 58.8% in January 2014. Fig. 10 shows both measures on one graph.

Table 4

Fig 8

Portland Cement Shipments: Total cement shipments in the 3 months ending January 2016 grew by 6.1%, 3 months year on year and were up 2.6% on a 12 month comparison, resulting in positive momentum of 3.5%, (Fig. 11). Fig. 12 shows consumption by census region for the three months ending January along with the y/y change. Comparing consumption by region, 23.2% of the cement consumed in the US was used in the West South Central region, 21.7% in the South Atlantic, while the Pacific region consumed 13.7%. The US regions with the largest 3 month percentage y/y increases, were the New England (26.0%), the Middle Atlantic region (18.3%). Regions posting y/y declines include the Mountain zone, off 4.5% and the West South Central down 0.4%, Fig. 13.

Fig 11

Steel Demand Indicators: Table 5 is a snapshot of the market situation on 4/7/2016. Indicators updated since we last published two weeks ago are shaded beige. In most cases this is not March data but data that was released in the last four weeks, the actual month to which the data relates is shown in the second column. Of the 26 indicators under consideration, the present situation of 5 are positive by historical standards, 10 are negative and 11 are neutral. This was no change from our last update on March 26th.

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 facts available as of April 7th 2016. The number of indicators trending positive in this latest analysis was 16 with 9 trending negative and one unchanged. Overall this was a decrease of one positive and an increase of one unchanged since our last update on March 26th. The changes in the detail were as follows. Consumer confidence as reported by the Conference Board was negative in February and improved to unchanged in March on a 3MMA basis. The supply of long products which is a proxy for demand reversed course in February when it contracted following two months of improvement. Advanced orders for durable goods improved in February after declining in January and manufacturing employment which had improved in February declined in March. As mentioned in our job creation report above, we think this may be a productivity issue. The Broad Index value of the US $ declined in both February and March therefore produced no change in our count in this update but which we regard as a positive because of the effect on net steel trade. There were no trend reversals in the construction data which with the exception of commodity prices are all improving. Each month we do a month end analysis which from a trends point of view was very encouraging on March 31st. We are now out of the slump which began in October and continued through January, followed by a small increase in February and a larger improvement in March.

We have separated the leading indicators from the main table for a closer look, these are shown in Table 6. Of the twelve leading indicators eight are trending positive, three negative and one unchanged. This was an increase of three positive since March 26th and of four positive since March 10th. In summary the present situation is historically weak but trends are good particularly for the indicators that we consider to be leading. (Explanation of Indicators).

Table 5

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