Weekly Market Update - November 5, 2015

Construction Put-in-Place: The US Commerce Department reports that total construction put-in-place (CPIP), surged 11.7% y/y ending September and a much stronger 17.2% on a 3 month y/y basis. Private construction rose 12.4% y/y and 19.4%, 3 months y/y, while State and Local also performed well, rising 9.6% and 12.2% y/y and 3 months y/y respectfully, (Table 1). Non-residential shot-up 22.2% y/y and 23.6%, 3 months y/y as single family residential moved ahead by 16.5% y/y and 17.5%, 3 months y/y. Every project category posted positive results on a y/y basis except Power at the State and Local level. Overall momentum (3 month minus 12 month), came in at a solid 5.6% for the month. After 67 consecutive months of y/y percentage declines during the period between mid-2006 to the beginning of 2012, we have witnessed 45 months in a row of y/y percentage gains, (Fig. 1). In constant 2010 dollar terms, CPIP has reached the level previously seen in 2008.

Table 2 breaks down non-residential construction (NRC), CPIP into eleven project categories. On a 12 month basis, the private sector accounted for $301.8 Bn of the $423.6 Bn or 71.2% of the total expenditure, leaving $111.8 Bn (28.7%), for State and Local. On a percentage y/y metric, private NRC forged ahead 27.7% y/y and a still stronger 29.1%, 3 months y/y. State and local grew by 5.5% y/y and 11.6%, 3 months y/y. Educational facilities recorded the largest total outlay at $74.4 Bn, up 9.7% y/y followed by manufacturing buildings with $71.3 Bn, which surged 54.3% y/y. Commercial construction projects, apartments (>4 stories), office, transport terminals, lodging and recreation all posted double digit percentage gains y/y. Only three project categories recorded negative momentum for the 12 months ending September to include; commercial (-4.7%), apartments (-4.1%) and religious (-3.3%). In last week’s Gerdau market update, we presented the Dodge (Source: Dodge Analytics), NCR starts data which was decidedly bearish, with overall starts off 30.6% (in square foot terms), 3 months y/y. This would seem to contradict this bullish CPIP report. Recall that CPIP are actual dollars spent on “construction put-in-place” and Dodge numbers are “starts” in which the entire value or total square-feet are recorded once the project begins. This gives a window of approximately one year into the future and indicates that future CPIP reports will not be nearly as rosy.

Table 1

Fig 1

Regional Job Creation through Q3 2015: Table 3 shows the history of quarterly job creation by region since Q1 2011. All regions except the North Central, (IA, KS, MN, MO, NE, ND and SD) had positive job creation in the 3rd quarter. Within the North Central region, Iowa and Nebraska had positive growth of 3,700 and 3,800 jobs respectively but North Dakota lost 4,400 jobs as horizontal drilling activity slowed. The South Central region (TX, LA, AR and OK) went off a cliff in Q1 this year after having the highest job creation of any region in Q4 last year. The South Central rebounded in Q2 and Q3 but is nowhere near where it was before the oil price collapse. Of the energy intensive states, Texas and Oklahoma have recovered somewhat due to their diversified economies but North Dakota has not. In every quarter of 2015, the Pacific region, (CA, OR and WA) has created the most jobs.

The regions have fared very differently since the pre-recession high of 1st Q 2008 and since the low point of 4th Q 2009. There are now 4,298,000 more people employed than there were immediately before the recession but of that number over half occurred in the South Central and Pacific regions. For the first time in Q3, every region had more people employed than it did at the pre-recession peak. The East South Central, (AL, KEN, MIS, and TEN) just made it over the line with a 0.01% improvement, (Table 4). Employment is now 12,728,000 positions higher than it was at the low point of the recession. The Pacific has had the largest number of jobs created during the recovery with an increase of 2,644,000 positions which amounts to 13.5% of total employment. The South Central is in 2nd place with 1,974,000 jobs created which is 12.8% of total employment. The East North Central (IL, IN, MI, OH and WI) currently has the highest number of employed people with 21,534,000, closely followed by the Pacific with 21,166,500, (Table 5).

Table 3

Table 4

Trends of Key Market Indicators: We now have over 5 ½ years of history of our key market indicators and have graphed the changes in the present situation and trends over time. Fig. 2 shows the change in our assessment of the present situation since January 2010 on a percentage basis. We have also re-created our analysis for August 2008 before the steel crash of September that year. Clearly at that time the present situation was fine and in fact better than it is today. In August 2008, 23.1% of indicators were classified as negative and 38.5% as positive. Today those figures are 30.8% and 23.2% respectively. The number of indicators classified as positive peaked in the 4th Q of last year at 12 and has steadily declined to the present value of 6. The change in 2015 has not been in the number of indicators classified as negative but rather in the number classified as OK by historical norms. Fig. 3 shows the trend of the numerical values of each indicator. There has been a steady deterioration since the middle of last year and in the October data the proportion trending positive fell to 50% for the first time since December 2012. In August last year the proportion trending positive was 85.2% which was a lead on the highest month of steel supply since the recession that occurred in October last year, (Fig. 4). The question is often asked, “Should we have seen the September 2008 disaster coming?” The answer based on this analytical technique is a definite “Yes” though of course we could have had no idea how bad it was going to be. In August 2008 over 2/3, (69.2%) of our indicators were trending negative.

Fig 2

ISM: The Manufacturing Index declined for the fourth consecutive month coming at its lowest level in more than two years at 50.1, (Fig. 5). The Index is dangerously close to the expansionary benchmark of 50.0. The Manufacturing Index is down nearly 14%, almost 8 percentage points, on a y/y basis. Production, New Orders, and Supplier Deliveries all rose in October from their previous month’s decline. Production rose to 52.9 from 51.8, New Orders to 52.9 from 50.1, and Supplier Deliveries to 50.4 from 50.2. Inventories fell two percentage points, 46.5 from 48.5, and is at its lowest level since December 2014 (45.5). Employment fell sharply to 47.6 from 50.5, its fifth straight decline, and lowest monthly reading since June 2009, the final month of the recession. With the subcomponents in upheaval over the last few months, it’s no surprise the Index is barely above the expansionary benchmark. Despite the mixed results of the index in September, the manufacturing sector grew for the 34th straight month and the overall economy expanded for the 77th consecutive month. (Institute for Supply Management)

Fig 5

Currencies: The U.S. Dollar index came in at 119.79, more than two and a half years with a value exceeding 100. With weak foreign economics, the Index has steadily climbed to levels seen during the beginning economic expansion of the 2000s. It has strengthened 11.2% on a y/y basis however relatively stable with a 1.1% growth over the last three months against the Daily Broad Index, (Table 6).

A strong economy, relative to the rest of the world, has helped the Dollar strengthen to its strongest level in twelve years. The Dollar strengthening makes scrap from the U.S. less attractive to buy on the global market and steel less attractive to buy from the U.S. Other major economies that rely on strong oil prices have also helped create an appreciative environment for the Dollar.

The Euro has appeared to stabilize since the abatement of the ‘Grexit’ dilemma. It has weakened slightly against the U.S. Dollar in the last three months with the currency currently trading at 0.908 Euro per Dollar. This week has seen a decline in the Euro in part to the strong U.S. Dollar amidst comments that the Fed Reserve Chairwoman would not raise interest rates until later this year or possibly 2016. Another factor has been the actions of ECF President Mario Draghi and his quest for monetary policy stimulus. The Euro bloc is currently experiencing dangerously low inflation and will not realize its target of 2% (same as the U.S.), in the immediate future. The ECB deposit rate has been in negative territory,-0.20%, for quite some time. This once thought impossible situation means that it’s more costly to store money in the bank thereby influencing behavior to spend. The open-ended comments regarding the program has the Euro weakening to its lowest since late July, right around the end of the ‘Grexit’ crisis.

Table 6

China Production and Exports: China crude steel production through August 2015 totaled 543.0 million metric tonnes (Mmt), down 2.0% YTD y/y, as reported by China Metals Weekly. Year-to-date, Chinese global exports totaled 72 Mmt, a y/y increase of 31.9% representing 13.3% of its total production. Chinese steel exports to the US, as reported by S.I.M.A., totaled 1.783 Mmt YTD 2015, a 2.7% decrease y/y. Chinese production of long products totaled 329.0 Mmt, down 4.5% y/y. However, long product exports increased by 51.6% to 30.6 Mmt YTD, up from 20.2 Mmt YTD in 2014. Long products exports as a percent of long product production surged to 10.6% in August up 4.5 percentage points compared to August 2014, (Fig. 6). The distribution of Chinese total long product production YTD is presented in Fig. 7.

Fig 6

U.S. Steel Capacity Utilization: Domestic raw steel production for week ending October 31st, fell for a 5th consecutive week, operated at a capacity utilization rate of 68.6% producing just 1.600 million tons, down 5% m/m. For reference this week one year ago, US mills produced 1.815 million tons at 75.5% capacity utilization. October was the 2nd month, this year that production fell below 70% of capacity. The previous occurrence was in April 2015 (67.7%). Prior to that the last time production fell below the 70% threshold was October 2012. The unadjusted YTD total was 75,562 tons, down 7.3% y/y, (Fig. 8).

Production declined in all regions, with the Midwest region posting the largest y/y percentage decline, off 11.1% y/y, followed closely by the Southern region, down 10.55 y/y. The Western district recorded the lowest decline, off a comparatively small 1.6% y/y, (Fig. 9).

Fig 8

Cement Consumption: Rising cement consumption has historically been an excellent proxy for construction growth. For the three months ending August, Portland cement shipments increased 4.9% to 29.5 million tons y/y, (Fig. 10). Consumption increased 3 months y/y in every region of the country, led by the South Atlantic, up 9.9% to 4.842 million tons. The next largest percentage increase was in the Mid-Atlantic, up 7.4% to 2.426 million tons, (Fig. 11). The largest consumer by volume continues to be the Southwest region, however the pace of growth has languished thus far in 2015. This is no-doubt a function of the fallout in energy prices, (Fig. 12).

Fig 10

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