Weekly Market Update - September 10, 2015

Commercial Property Price Index: The 3MMA CPPI moved up 15.7%, 3 months y/y and by 14.4% y/y, reaching its highest point since the index started in December 2000, (Fig. 1).

U.S. commercial real estate transaction volume fell 14% in July on $3.6 Bn in sales. Sales volume has hit a speed bump in recent months especially in certain market sectors as shown in Table 1. Note the considerable variation in national property price appreciation across the segments. Retail remains 6.6% below its pre-recession peak, while apartments are 30.3% higher. Recent turmoil in global equity markets, the rise in the Chinese Yuan, uncertainty about when the FED will raise interest rates coupled with a 30 basis point fall in the 10 year bond all have combined to put investors on edge. Yet according to Real Capital Analytics this financial havoc may actually generate more activity for core property investments since falling yields result in lower borrowing cost.

Surging prices beyond previous peak levels begs the question; Is this another bubble in the making? Have lenders relaxed lending standards too much? According to the quarterly Senior Loan Officer Survey published by the FED, banks have only eased standards modestly for commercial loans even with strong demand. Record low mortgage rates (in the 4% range), distorts the historic picture somewhat resulting a very low cost index. Real Capital Analytics writes that “It is a stretch to say that lending standards are as aggressive as those seen in the period from 2005 to 2007. The low interest rate environment is simply bringing headline figures in line with other financial instruments. Lenders are pricing in risk to a greater degree than before which does not suggest aggressive lending”.

Fig 1

Table 1

Net Job creation: The Bureau of Labor Statistics (BLS) analysis of non-farm employment reported on September 4th that 173,000 jobs were added in August which was slightly below Moody's Analytics expectation. June and July payrolls were revised higher by a combined 44,000. The unemployment rate, calculated from a different survey, fell to a new post-recession low of 5.1%, as unemployment and the civilian labor force both declined. Monthly job gains have averaged 212,000 per month in the first eight months of 2015. The three month moving average, (3MMA) of gains through August was 221,000 which was down by 29,000 from July, (Fig. 2). These numbers are seasonally adjusted by the BLS. Total nonfarm payrolls are now 3,923,000 more than they were at the pre-recession high of January 2008.

Table 2 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. In August, 140,000 jobs were created in the private sector and 33,000 in government. This was the most jobs created in government in one month since October 2011. Two thirds of government employment expansion in August was at the local level. Since February 2010, the employment low point, private employers have added 13,120,000 as government has shed 481,000. In August service industries expanded by 197,000 as goods producing industries shed 24,000 people. Since February 2010, service industries have added 10,726,000 and goods producing 1,913,000 positions. Manufacturing lost 17,000 jobs in August which was the worst result since July 2013. Primary metals lost 2,100 jobs in August following 1,100 jobs lost in July and has had not had a positive result in any month of 2015. Motor vehicles and parts gained 5,700 jobs in August so the poor manufacturing numbers were not due to auto plant summer shutdowns. Oil and gas extraction has had negative job creation in all four time periods examined. Truck transportation added 700 jobs and is now past its pre-recessionary peak of January 2007. Construction added 3,000 jobs in August, down from 7,000 in July. Since the bottom of the employment recession, construction has now crept ahead of manufacturing as a job creator. Construction has added 888,000 jobs and manufacturing 876,000 since the recessionary employment low point in February 2010, (Fig. 3). Construction has been holding back steel demand but that should increasingly not be the case.

Fig 2

Table 2

Long, flat, and Semi-finished Imports through August 2015: Licensed data for August was updated on September 4th through the Steel Import Monitoring System of the U.S. Commerce Department. Total rolled product licensed imports in the single month of August were 2,282,930 short tons with a 3MMA of 2,393,674 tons. August licenses were down by 9.3% from the final July volume. On this basis long products were down by 1.2%, flat rolled was down by 12.2% and pipe and tube down by 3.6%. At Gerdau we prefer not to dwell on single months results because of the extreme monthly variability that can occur in individual products. In the comments below we use three month moving averages to get a more representative picture.

Fig. 4 shows the 3MMA through August licenses for semi-finished, flat and long products. Long product imports have been stuck in the range 519,000 tons and 772,000 tons since March last year with no particular trend evident. The 3MMA of flat rolled imports peaked at 1,634,000 tons in November last year and has since declined to 1,298,569 tons in August. Last October the 3MMA of semi-finished imports was 930,000 tons and this volume declined to 627,394 tons in August.

Fig. 5 shows the trend of individual long products since January 2011 as three month moving averages. The biggest change has been in re-bar imports, down from 212,292 tons in April to 148,137 in August. Hot rolled bars have been declining since mid-2014. Wire rod has been range bound for a year and structural got some relief in July and August.

Table 3 provides an analysis of major product groups and of long products in detail. It compares the average monthly tonnage in the latest three months through August with both three months through May, (3M / 3M) and June through August last year, (y/y). Semi-finished slabs, blooms and billets were up by 19.0% 3M / 3M but down by 24.5% y/y. The total tonnage of hot worked products was 2,393,674 tons in August on a 3MMA basis, down by 362,453 tons from August last year. The three moving average was down by 15.8% from the average of three months through May and down by 13.2% from a year ago. These trends indicate that in the big picture the peak of import volume has passed but this is not necessarily true for individual products. The color codes in Table 3 for the three month and year over year change show which products are improving and which are still experiencing import volume increases.

For total long products the tonnage was down by 17.2% 3M / 3M but up by 5.1% y/y. In the 3M / 3M comparison, the only long product having an import increase was wire rod. Imports of pipe and tube declined by 31.8% 3M / 3M and rail products were down by 14.4%.

Fig. 6 shows the import market share of long and flat products through June which is the latest data available for total steel supply. For long products the import share skyrocketed in January through April then declined sharply in May and June. April share was 29.4%, June was 26.2%. The import market share for sheet products peaked at 24.3% in March and fell to 22.4% in June.

Fig 4

Fig 5

Table 3

ISM Nonmanufacturing Index: The ISM Nonmanufacturing Index trimmed 1.3 points in August from July to 59.0 from 60.3, (Fig. 7). Despite the decline, August’s results were the second highest of the year while July and August had the two highest back to back readings since Q1 2011. All four subcomponents slid in August after their tremendous surge in July. Employment fell the most shedding 3.6 points to 56.0. Business Activity dropped a point to 63.9 while Supplier Deliveries and New Orders fell 0.5 and 0.4 points, respectively. All categories remained above 50, the expansionary benchmark, leading to a robust Q3. According to Moodys, nonmanufacturing counts for 88% of GDP. (Dismal Scientist).

Fig 7

Portland Cement Shipments: U.S. Portland cement shipments increased a modest 2.3% on a three month y/y ending June comparison to reach 26,346,000 tons. All regions of the country posted gains except for the West South West (-6.3%) and the Mountain zone (-0.3%). The largest y/y percentage gain was in the East North Central (+10.4%), followed by the Southeast (+6.1%), (Fig. 8). Fig. 9 presents a historical comparison by region from 2004 to present. The Southwest has had the largest volume since the recession ended but has faltered over the past few months, while the slope of the Southeast is accelerating as is the East North Central. Nationally momentum (3 month moving average y/y growth rate minus the 12 month total y/y growth rate) fell 4.4% in June and has now been negative for 4 consecutive months indicating a slowdown in demand on a national basis, (Fig. 10).

Fig 8

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