Weekly Market Update - March 5, 2015

Total Construction Put-in-Place (U.S. Census Bureau): Total CPIP rose 4.8% y/y for the twelve months through January, and was up 4.4% on a three month y/y basis, (Table 1). Private construction spending over the last 12 months totaled $617.9 billion (Bn), up 5.8% y/y. Private CPIP was up 3.6%, 3 months y/y, while State & Local construction rose 2.3% 12m y/y and was up 7.1%, 3m y/y. Lead by non-residential construction and single family residential, CPIP was also strong for highway & street projects, transportation as well as sewage & waste construction. The only category to post a decline for both 3 months and 12 months y/y metrics was power projects at the State & Local level, off 4.5% y/y and down 18.5% y/y.

Table 1

Non-residential CPIP rose 10.6%, spending $353.9 Bn over the last twelve months; $250.2 Bn spent in the private sector and $103.7 Bn spent in the public sector, (Table 2). Expenditures for non-residential CPIP, over the last 3 months, rose 15.2% with solid positive momentum of 4.5%. Education was flat y/y, rising 0.9%, but was up a robust 4.7%, 3m y/y. Manufacturing building projects rose 16.9% y/y, as commercial construction rose 13.2% y/y. Momentum for all project sectors were “green” (growth), with the exception of apartment and office buildings.

In an encouraging sign, expenditures for private buildings (excluding single family residential), have accelerated throughout 2014 and are continuing into early 2015 as evidenced by the slope change of the dashed orange line in Fig. 1. For reference, the red arrows depict historic growth rates after a recessionary period. Fig. 2 presents total infrastructure spending on the left axis and y/y change on the right. Expenditures fell sharply throughout 2011 and plateaued throughout 2012 and 2013 before commencing to rise in 2014. Expenditures have now been accelerating m/m for four consecutive months.

Table 2

Non Residential Construction Starts, (McGraw Hill Dodge): On a rolling 12 month basis total non-residential construction starts including high rise apartments peaked in 2007 at 1.9 billion square feet. At the present rate it will be late 2019 before volume returns to that level. (Fig. 3). We include high rise apartments in non-residential because that market is an under-exploited opportunity for structural steel fabricators. Since the beginning of the recovery from the recession the growth rate of non-residential square footage including apartments has been considerably greater than the rate excluding apartments, (Fig. 4). Excluding apartments a full recovery, (assuming no recession before then) won’t occur until late 2021. Past trends don’t necessarily continue into the future and the growth rate of apartment construction may be a case in point. It looks as though this market is approaching or already at saturation, having recovered to a level beyond the pre-recessionary peak and having its growth rate decline to zero in recent months. This decline in the Dodge square footage is corroborated by the Census Bureau housing statistics. Total non-residential starts at almost 1.2 billion square feet were up by 8.7% on a rolling 12 month basis year over year, (Table 3) with negative momentum. Manufacturing plants are the highest growth sector both on a rolling 3 and 12 month basis y/y. There are signs that the institutional sector is reviving with a 30% growth of civic buildings on a rolling 3 months basis. This is confirmation of the Commerce Department construction put in place results for January that were released on Monday this week, (see discussion above). Ditto for educational buildings, which declined every month for five years through March last year, but which have now had ten straight months of positive growth. Hotels / motels which had blistering growth since January 2011 slowed to a negative growth of 6.7% in 3 months through January with highly negative momentum. Office and bank starts also experienced negative growth in three months through January with very negative momentum. Excluding apartments, total non-residential growth has slowed for seven straight months from 23.9% in June to 2.2% in January on a 3MMA basis year over year.

Fig 3


Fig 4

The Chicago Fed National Activity Index: The CFNAI is a weighted measure of 85 economic indicators that gauge economic activity and inflationary pressures (Federal Reserve Bank of Chicago). The indicators are derived from production and income, employment, unemployment and hours, personal consumption and housing, sales, orders, and inventories. The Index has a value of 0 and standard deviation of 1, with a positive reading signaling above average growth and negative reading signaling below average growth.

The Index reading in January rose to 0.13, up from December’s negative reading of -0.07. The CFNAI has been positive for 10 of the last 12 months, (Fig. 5). The indicator CFNAI-MA3 is a three month moving average that reduces volatility in the CFNAI headline reading. The reading for January was 0.33, flat from December, however, slightly down from November’s reading of 0.48 but still indicating that the economy was growing above historical trend for the 11th consecutive month. All indicators, except for Personal Consumption and Housing, saw readings above historical trend. The Employment subset has been above historical trend for 21 straight months, the longest reading on record and exceeding 1993-1995’s record of 20. Recent data releases involving increased employment and decreased unemployment claims contributed to the positive reading. Personal Consumption and Housing has yet again recorded a negative reading, 97 months in a row of below trend growth. The last above average reading was in December 2006 (PCH 1998). Since GDP equals consumer spending plus investments plus net exports plus government spending, this reading depresses potential GDP growth.

The CFNAI is a leading indicator for steel consumption and historically there has been a firm relationship between the CFNAI index and steel supply up to the start of the recession. The CFNAI experienced a healthier recovery than “Long Product” steel supply. The construction sector has yet to experience the growth typically seen in the recovery after a recession; however, the gap seems to be closing, more than five years after the recovery began.

Fig 5

ISM Manufacturing Index fell again in February to 52.9, the fifth consecutive month of decline. Despite the fall, the ISM Index has been above the expansion benchmark, greater than 50, for the 21st consecutive month, (Fig. 6). The 3MMA has also plunged for 5 straight months after October’s three year high of 57.3. Production fell sharply from 56.5 to 53.7, the sixth straight decline. New orders and employment also fell in February, however, Inventories climbed back to 52.5, tying the 8 month high back in October 2014. Employment declined for the third straight month despite the economy adding more than one million jobs from November through January. Friday’s jobs figures comes out at 8:30 AM. According to the Manufacturing ISM Report on Business, the manufacturing sector grew for the 26th straight month; the overall economy expanded for the 69th consecutive month – nearly six years. (Institute for Supply Management).

ISM Nonmanufacturing Index inched forward again in February to 57.0, the third straight month of growth. The 3MMA has dipped for the fifth straight month down to 56.7. Business Activity and New Orders both declined in February after increases in January. Employment figures for ISM-Nonmanufacturing rose in dramatic fashion to 56.4 from 51.6, which could be foreshadowing a strong jobs report Friday despite another brutal winter.

Fig 6

Preliminary US Long Product Imports (SIMA): January Preliminary imports rose 6% from December, and totaled 481,000 tons, yet are 16% below January 2014, (Table 4). Wire rod imports rose 7% m/m, as Japan and Brazil imported 27,500 tons more than was originally licensed. Year on year wire rod imports were down 17%. Rebar imports totaled 123,000 ton up 19% m/m, yet were down 52% y/y. Light structural imports fell 12% in January and were down 14% y/y, while heavy structurals (including beams) rose 75% y/y. This y/y increase was led by beam & structural imports from Mexico and the UK, as well as an increased level from Korea and China. January 2014 beam imports were flat y/y, but were up 139% on a y/y basis.

Table 4

Portland Cement Shipments (PCA): US Portland cement shipments posted growth of 8.8%, 3 months y/y ending December. Comparing the 2014 with 2013, shipments increased by 8.5% to 95,754,000 tons. The Southwest consumed the greatest quantity (5,532,000 tons) and posted the largest percentage increase at 15.0%, 3 months y/y. The next largest volume consumption was in the Southeast at 4,257,000 tons up 7.3% y/y.  All regions recorded gains q/q, (Fig. 7). Cement consumption is a good proxy for rebar consumption and for non-residential construction in general.

Fig 7

Steel Demand Indicators: Table 5 is a snapshot of the market situation on 3/5/2015. 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. This month we have reduced the number of indicators from 27 to 26 by removing “Consumer debt as a % of income”. This indicator returned to a negative as recovery from the recession has proceeded and will not change in the absence of another severe recession therefore it does not serve our purpose as a dynamic measure of market activity. Of the 26 indicators under consideration, the present situation of 10 are positive by historical standards, 8 are negative and 8 are neutral. This was an increase of one neutral and a decrease of one positive and a decrease of one negative since the February 19th update. The changes we made to our view of the present situation were that bank lending standards for commercial and industrial loans were re-classified from positive to neutral, and consumer debt was removed as described above. There were no other changes to our view of the present situation. 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. In total there was no change to the number of indicators trending positive but there were changes in the details. In the Q1 report on bank lending standards from the Federal Reserve, loan demand for commercial and industrial loans increased, this was a reversal from the Q4 2014 report. In the steel long products section apparent supply contracted in January by 68,000 tons after expanding by 303,000 tons in December, (both on a rolling 3 months basis y/y). All indicators in the construction and manufacturing sections continued to trend as they did in our February 19th update. Two data results that didn’t change direction in the recent reports are worthy of special note. Infrastructure expenditures are expanding strongly and this is driving rebar consumption and non-residential starts as reported by McGraw Hill Dodge slowed abruptly from a growth rate of 9.1% in December to 1.5% in January. (Explanation of Indicators).

Table 5

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