Weekly Market Update - May 5, 2016

Construction Put-in-Place: Total CPIP continued to record solid growth in March, up 14.5% y/y with a slightly weaker 12.5%, 3 month y/y. The private sector posted 17.9% growth y/y and 15.3%, 3 month y/y, while the State and Local sector grew by a more modest 8.2% y/y and 8.6%, 3 months y/y, (Table 1). Fig. 1 charts total building construction from 2010 to present, illustrating the strong run it has had after the recession ended. Single family residential (SFR), recorded strong percentage growth of 15.0% y/y, falling to +11.6% on a 3 month y/y comparison. Fig. 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. In addition the percentage y/y values have been steadily decreasing. A limited recovery in the SFR construction segment has been a significant economic headwind since the start of the recovery. SFR starts averaged 792 units (rolling 12 month average) vs. the 10 year average from 1997 to 2007 of 1,389. Highways and streets saw a 11.1% y/y increase and was one of only two project category to record a stronger 3 month y/y number (19.9%), resulting in positive momentum of +8.8%. Fig. 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, up 8.5% y/y ending March. 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) and more people working and paying taxes.

Table 1

Non-Residential Construction also continued to record notable growth, up 18.5% y/y, declining to 14.6% on a 3 month y/y basis. The private sector surged 22.9% y/y, falling to 17.5%, 3 month y/y, while the State and Local sector grew by a more modest 7.9% y/y and 6.3%, 3 months y/y, (Table 2). Education was the project category with the largest expenditure for the year ending March at $96.2 Bn (NSA), up 10.5% y/y and up a stronger 13.9%, 3 months y/y. This was one of three project categories with positive momentum (+3.5%).

Manufacturing building construction has slowed significantly to +4.5%, 3 month y/y growth rate after surging 34.8% over the past 12 months. Fig. 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

Institute of Supply Management Manufacturing Index: The ISM manufacturing index managed to remain above is expansionary threshold of 50 in April, coming in at 50.8 for the month and 50.7 on a 3MMA basis, (Fig. 5). The index snapped a five month losing streak and has now posted positive numbers (>50) for two months in a row suggesting that the worst may be behind us. Breaking the report down into its sub-indexes shows that New Orders fell 2.5 points to a still robust 55.8, while Production fell 1.1 point to 54.2. On the negative side Inventories fell further into negative territory, down an additional 1.5 points to 45.5, Supplier deliveries fell 1.1 points to 49.1 and Employment improved 1.1 points to 49.2. The trade data indicates that net exports were neutral for growth early this quarter. New export orders rose from 52.0 to 52.5 while imports rose from 49.5 to 50. This situation was helped by the recent moderation of the dollar and by recent improvements in the global economy including China and the euro-zone. According to Moody’s getting bloated inventories in-line is the main challenge going forward and believes that manufacturing “is in a rut, not a recession”.

Examining the Federal Reserves’ manufacturing capacity utilization data (Fig. 6), shows that we are right on the cusp of recession at 75.14 points, (75 to 85 is the “ideal zone”). Capacity utilization has been in bound in a tight range of between 74.1 and 76.3 for 55 consecutive months. The Federal Reserve issues an additional data set known as the US Industrial Production Index, (Fig. 7). This charts shows that the IP index expanded for 5 ½ years after the recession ended but has now fallen on a y/y basis for each of the last seven months ending March. Thus the IP index presents a somewhat more pessimistic outlook as compared to the ISM manufacturing viewpoint.

Fig 5

Institute of Supply Management Non-Manufacturing Index: The ISM non-manufacturing index moved ahead 1.2 points in April to 55.7 and 54.5 on a 3MMA basis, (Fig. 5). This was a better increase than most economists had inspected and indicates that the US economy is healing after a bleak start through the winter months. The rise in the price of oil and cooling of the dollars accent helped with the improvement in the index. The respondents noted a significant shortage in labor impacting the rate of growth in the construction sector. The concern is that this shortage will constrain the availability of new homes over the next several months. Unemployment levels are close to historic lows, supported by the jump in the ISM employment sub-index which moved-up 2.7 points to 53.0 in March. Another concern going forward is the tightening of access to capital in the financial markets.

Fig 6

Non-Residential Vacancy Report: On a national basis office vacancies fell 0.5% in Q1-2016 y/y to 16.1%. The Northeast recorded the lowest office vacancy at 13.5%, while the Midwest posted the largest office vacancy at 18.6%, (Fig. 8, Table 3). Over the past few quarters, net absorptions have been higher than completions which means new construction of office buildings is likely to continue. Fig. 9, Table 3 shows the national retail vacancy chart displaying that the national average was 10.1% in Q1. The lowest retail vacancy was in the West at 8.7% and the highest was in the Midwest at 12.4%. Since net absorptions were greater than completions we can expect continued retail construction going forward. Apartment vacancies continue to be very low averaging just 4.5% on a national basis in Q1. The Northeast market recorded the lowest apartment vacancy at 3.9% with the highest measured in the Southwest at 6.4%. Apartment vacancies in the Southwest jumped from 5.6% in Q4 2015 to 6.4% in Q1 of 2016, in all probability due to the significant loss of energy related jobs in the region, (Fig. 10, Table 3). On a national basis Completions are outstripping net absorptions indicating that supply is exceeding demand and that construction of apartments may slow in the coming months. The Midwest is bucking the trend with net absorptions exceeding completions. (Fig. 11) shows national vacancies (annual chart), for industrial buildings which averaged 10% in Q1 down 0.4 points from the previous quarter. Net absorptions way out paced completions, so we can expect to see additional construction of industrial buildings over the near term.

Fig 8

US Steel Production and Capacity Utilization: The American Iron and Steel Institute reported US steel production for week ending April 30, 2016 totaled 1.711 million tons (mt), up 1.6% week over week, and utilizing 73.2% of US steel producing capacity. (Fig. 12) presents steel production with the blue bars, and the capacity utilization rate as the red line (read on the right axis). Production fell in all regions with the exception of the South, which rose 55,000 tons or 9.6% w/w. Month over month total US steel production rose 3.7%, (Fig. 13) supported by a 25% m/m increase in the Southern Region.

Year to date (YTD) US steel mills have produced an unrevised 29.9 mt, which equates to 70.7% of US capacity. Compared to steel production over the first four months through April 2015, production fell 3.3% YTD y/y. The Great Lakes region showed positive growth, up 0.9% YTD y/y, (Fig. 14). The Northeast and Southern regions were down 2.6% and 2.9% respectively, compared to total steel production through the end of April 2015. The Western US was down 8.7% YTD y/y while the Midwest region, was off 15.0% YTD y/y.

Fig 12

Steel Demand Indicators: Table 4 is a snapshot of the market situation on 5/5/2016. Indicators updated since we last published two weeks ago are shaded beige. In many cases this is not April / May 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, 11 are negative and 10 are neutral. This was an increase of one negative and a decrease of one neutral since our last update on April 21st. The change that occurred was in the willingness of banks to make commercial and industrial loans. This data is reported quarterly by the Federal Reserve and is a survey of the senior officials of US banks and branches of overseas banks. A net 11.6% of banks reported a tightening of lending standards in the 2nd quarter survey, up from a net 8.3% who reported tightening in the 1st quarter.

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 5th 2016. The number of indicators trending positive in this latest analysis was 17 with 9 trending negative. Overall this was an increase of one positive and a decrease of one unchanged since April 21st. There were several changes in the detail. The Chicago Fed National Activity Index which had been trending positive since December, reversed course and trended negative in March. Consumer confidence which was unchanged in March, trended negative in April. Demand for commercial and industrial loans improved in the 2nd Q with a net negative 8.7% of banks reporting declining demand. In Q1 a net 11.2% reported declining demand. Therefore as far as bank lending standards are concerned there is a net increase of banks tightening at the same time as the decline in demand is slowing. In the March data both apparent supply and shipments of long products turned around and expanded, the first time for that to occur since April last year. Advanced orders for durable goods declined in March after expanding in February.

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 in April.

We have separated the leading indicators from the main table for a closer look, these are shown in Table 5. Of the twelve leading indicators seven are trending positive, and five negative. This was a decrease of one positive, also of one unchanged and an increase of two negative since our April 21st update. 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.
(Explanation of Indicators).

Table 4

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