Weekly Market Update - June 2, 2016

Total Construction Put-in-Place: Total CPIP continued to record solid growth in April, up 14.1% y/y with a slightly weaker 12.1%, 3 month y/y. The private sector posted 17.3% growth y/y and 14.5%, 3 month y/y, while the State and Local sector grew by a more modest 7.6% y/y and 6.4%, 3 months y/y, (Table 1). Figure 1 charts total building construction from 2010 to present, illustrating the strong run it has had after the recession ended. The rate of growth measured as percent change y/y has plateaued over the past several months but remains >10%. Single family residential (SFR), recorded strong percentage growth of 14.8% y/y, falling to +13.6% on a 3 month y/y comparison. Figure 2 shows the expenditure history of SFR back to 2005 on the left axis and percent y/y change on the right. This chart reveals that despite solid percentage y/y growth numbers, expenditures on SFR are still low relative to historic levels. After falling in percentage y/y terms throughout 2015, we are now seeing a reversal in 2016. A limited recovery in the SFR construction segment has been a significant economic headwind since the start of the recovery, but is now looks starting to accelerate. Highways and streets saw a 10.6% y/y increase and was one of only two project category to record a stronger 3 month y/y numbers (11.3%), resulting in positive momentum of +0.7%. Figure 3 charts total infrastructure expenditures from 2005 to present in non-seasonally adjusted, constant 2009 dollars. Expenditures have been rising for 45 consecutive months since mid-2012 before plateauing in April, up 7.6% y/y ending April. Infrastructure investment should continue to perform well for the foreseeable future with the passage of the 5 year $305Bn FAST act (FIXING AMERICA’S SURFACE TRANSPORTATION ACT) as more people working and paying taxes.

Table 1

Non-Residential Construction also continued to record notable growth, up 17.1% y/y, declining to 12.6% on a 3 month y/y basis. The private sector surged ahead by 21.4% y/y, declining slightly to 15.0% growth on a 3 month y/y comparison. State and Local sector grew by a more modest 7.4% y/y and 6.0%, 3 months y/y, (Table 2). Education was the project category with the largest expenditure for the year ending April at $96.9 Bn (NSA), up 10.4% y/y and up a stronger 12.3%, 3 months y/y. This was one of five project categories with positive momentum (+1.8%). Commercial construction posted 9.5% annual growth and jumped to 14.5% when measured on a 3 month y/y basis.

Manufacturing building construction has slowed significantly to -2.6%, 3 month y/y growth rate after surging 27.9% over the past 12 months. Figure 4 shows that both the y/y percentage growth and spend rate on manufacturing buildings is declining after a long run of strong growth. Although the expenditure rate has declined for five consecutive months, it still remains at an elevated level vs. history indicating continued strength in this sector.

Table 2

Advance Orders for Durable Goods data for April increased by 3.3% from March to $239.5 billion which beat consensus expectations. This was the first two month successive gain since June / July last year and was mainly a result of a surge in civil aircraft orders. Figure 5 shows the monthly result with its trend line since January 2010. Orders have been below their six year trend since November 2014. The huge spike in July 2014 was also caused by a surge in civil aircraft orders and resulted in that month’s number being a complete outlier in this data series which seriously distorted the year over year growth rate shown in Figure 6. The durable goods data is routinely whipsawed by both civil and military aircraft orders but we include it in our steel analyses because it is a reality check for other manufacturing data and is described by the Census Bureau as one of the earliest indicators for US manufactured goods. In spite of the improved results in March and April the 3MMA was unchanged and year over year the 3MMA declined by 0.9%.

The official news release from the Census Bureau on May 26th included the following; Shipments of manufactured durable goods in April increased by 0.6% following two consecutive monthly decreases. Transportation equipment was also up following two consecutive monthly decreases. Unfilled orders for manufactured durable goods in April increased by 0.6 percent to $1,137 billion. Transportation equipment, up for the second consecutive month, led the increase. Inventories of manufactured durable goods in April were down, adding to a string of nine of the last ten months.

Last week the Bureau of Economic Analysis released the second estimate of GDP growth for Q1 2016. The GDP data includes a line item for durable goods which is shown in Figure 7 and which does not include aircraft. With two minor setbacks the durable goods component of GDP has been improving steadily since the recession. The Q1 data declined by 0.31% Q / Q and broke a string of 18 consecutive quarters of increases.

Figure 5

Figure 6

The Chicago Fed National Activity Index is a weighted average of 85 indicators of national economic activity drawn from four broad categories of data: 1) production and income; 2) employment, unemployment, and hours; 3) personal consumption and housing; and 4) sales, orders, and inventories. A zero value for the index indicates that the national economy is expanding at its historical trend rate of growth; negative values indicate below-average growth; and positive values indicate above-average growth. The CFNAI rose to positive 0.1 in April, up from negative 0.55 in March. Because of the variability in the reports we prefer to use a 3MMA and on this basis the index has declined in both March and April when it reached negative 0.22. Figure 8 shows the 3MMA of the index through April. Figure 9 shows the trends of the four main subcomponents. Personal consumption and housing has been steadily improving since the recession but is still in negative territory. The production and income component has been extremely erratic and was the reason for the positive April result. The official news release included the following; “Led by improvements in production-related indicators, the Chicago Fed National Activity Index (CFNAI) rose to +0.10 in April from –0.55 in March. All four of the broad categories of indicators that make up the index increased from March. April’s CFNAI-MA3 suggests that growth in national economic activity was some¬what below its historical trend. The economic growth reflected in this level of the CFNAI-MA3 suggests subdued inflationary pressure from economic activity over the coming year. Forty-five of the 85 individual indicators made positive contri¬butions to the CFNAI in April, while 40 made negative contributions.”

Figure 8

US Employment: US unemployment rate remained flat in April at 5.0%, (Figure 10) as reported by the Bureau of Labor Statistics, with 7.9 million persons out of work. The number of unemployed persons remained little changed, as new initial claims for unemployment insurance fell to 268,000 (SA) for the week ending May 21st. This marks 64 consecutive weeks of initial claims below 300,000, the BLS reports this as “the longest streak since 1973.” Improvement in the unemployment rate was reflected in declines of initial unemployment claims, continuing unemployment claims, (Figure 11) and decreases in the participation rate. The number of Americans receiving long term benefits (those jobless for 27 weeks or more) fell to 2.1 million in April. These individuals accounted for one-fourth of the unemployed. The Bureau of Labor Statistics does not elaborate if the individuals leaving this category found employment or where those who’s benefits had expired.

The employment to population ratio takes the total persons of working age that are currently in the labor force compared to the total US population age 16 and older. In Figure 12 the gap between the Employment to Populations ratio (the red line) and those who are currently participating in the workforce (blue line) highlights the great number of Americans who were jobless during the four years Post Recession. Since 2014 this disparaging gap slowly closed, as businesses began hiring new employees, yet many American workers of employable age were recorded as “discouraged” and continued to steadily leave the labor force. These individuals sought self-employment, opened their own business or remained marginally attached to the labor force. Marginally attached workers wanted to work and were available for work, but had not searched for a job in the last month, and as such are not counted as “unemployed”.

Net job creation, as reported by the Bureau of Labor Statistics, added 160,000 new jobs in the month of April, and has improved by 14,182,000 jobs since the recession ended. While the continuingly shrinking workforce pool will generate a healthier unemployment percentage number, the US is still adding jobs and employing more Americans than it was a year ago, two years ago and five years ago. April employment gains were seen in Professional and Business Services, Education and Health Services, and Financial Activities. Total private business non-farm employees also increased the number of hours they worked to 34.5 hours per week, and saw a $0.05 increase in their hourly compensation, (Figure 13). Major industries such as Construction, Manufacturing, Transportation and Warehousing, Wholesale and Retail Trade, were little changed in the number of employed, yet had increases in the average hourly work week, or had small increases to their hourly earnings.

Figure 10

Figure 11

Institute of Supply Management, Manufacturing Index: The ISM purchasing manager’s index moved up 0.5 to 51.8 in April and posted a 3MMA of 51.3 in an encouraging sign that manufacturing is strengthening, (Figure 14). Of the five sub-indexes, three were greater than 50 (>50 = expansion) including; Production, New orders and Supplier deliveries and two were under 50 (<50 = contraction) including; Employment and Inventories. Fourteen industries reported growth in new orders, one less than in April. Four industries reported a decrease in new orders in May: apparel/leather, transportation equipment, petroleum/coal and furniture. There is strong evidence of emerging inflation in the “prices paid” portion of the ISM report which jumped from 33.5 in January to 38.5 in February to 51.5 in March to 59.0 in April to 63.5 in May. Thirteen of the 18 industries reported paying increased prices for raw materials in May. Among the commodities noted seeing increased prices were aluminum, scrap, copper, crude oil and diesel fuel. In the past the FED adjusted monetary policy when the priced paid number surpassed 65. Moody’s Analytics think that this past relationship has decoupled and that the FED will be patient on raising interest rates. Despite the overall positive report, a quick turn-a-round in manufacturing in unlikely. Appreciation of the US dollar and weakness in the global economy and domestic inventory cycle will continue to weigh heavily on manufacturing.

Figure 14

Steel Demand Indicators: Table 3 is a snapshot of the market situation on 5/31/2016. Indicators updated since we last published two weeks ago are shaded beige. In many cases this is not May data but data that was released in May, 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 an increase of one neutral and a decrease of one negative since our last update on May 19th. The change that occurred was in the shipments of long products which in the last three months broke out of the negative category where they have languished since the recession. We consider that threshold to be > 4.5 million tons in three months. In three months through April shipments were 4.9 million tons.

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 May 31st 2016. The number of indicators trending positive in this latest analysis was 17 with 9 trending negative. Overall this was an increase of one negative and a decrease of one positive since May 19th. The change that occurred was that nonresidential construction starts as reported by Dodge Analytics for April trended negative for the first time since February this year. There were no other trend changes. At the end of each month we analyze the trend of the trends to see if the number trending positive is improving or deteriorating. 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 that has been sustained through May.

We have separated the leading indicators from the main table for a closer look, these are shown in Table 4. Of the twelve leading indicators seven are trending positive, and five negative. This was a decrease of one positive and an increase of one negative since our May 19th update. This change was in nonresidential starts as mentioned above.

In summary the present situation is historically weak but trends are good which leads us to have confidence in the business environment through the 3rd quarter. The increase in long product shipments is particularly encouraging though imports are still taking a very high market share. (Explanation of Indicators).

Table 3

Table 4

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