Weekly Market Update - July 28, 2016

Non-residential Square-Foot Starts: Nationally, overall starts plummeted by 17.4%, 3 months year / year, after declining in eight of the past twelve months on a 3 months y/y metric. Every project category declined in June, 3 months y/y. On a 12 month y/y basis starts fell by 6.6% resulting in negative momentum of 10.8%. Year on year starts have been down five months in a row with the value becoming increasingly negative in each of the past three months, (Table 1).

Manufacturing plants fell the most in percentage terms, off 44.2 %, 3 months y/y, followed by transportation and religious buildings, off 39.4% and 32.8%, 3 month y/y respectfully. Apartments (> 4 stories) which has been the largest square-foot category since the recession ended declined 26.2%, 3 months y/y, its second consecutive decline and much larger than last month’s -9.9%. Warehousing, the second largest square-foot category since the recession, also fell in June, off 9.7%, 3 months y/y. Warehouse construction was one of just three project categories to record positive growth on a twelve month y/y basis (+7.3%), the other two were; Food & beverage, (+5.3%) and Hotel/motel (+1.6%).

Figure 1 presents a chart showing starts data on a rolling 3 month basis from 1990 to present for all non-residential, (including apartments > 4 stories). Examining the data, we see that in each of the previous three occurrences there was a y/y decline of the magnitude we are now seeing. The fall-out in square-foot starts continued until the beginning of the next non-residential up-turn. Starts data gives us a window into the future of 9 to 12 months of what we can expect to see in future US Census Bureau Construction put-in-place (CPIP) data. In May’s report total non-residential CPIP was up 10.6%, 3 months y/y, however the momentum (3 month y/y minus 12 months y/y) has been declining for 10 consecutive months. Figure 2 charts CPIP in dollars and Dodge starts in square feet on a two axis chart. Dodge starts are shifted forward 12 months (the forward look that starts provide). The correlation between the two data sets is fairly strong at 0.782. Based on this relationship it is probable that we will see declining CPIP values in the coming months. Hopefully the Dodge starts numbers will reverse directions shortly. In its (June 2016), Outlook, Dodge forecasted 2017 total construction to increase by 10% in 2017, with Commercial +8%, Institutional +12% and Public Works +8%. On the downside, Electrical Utilities and Gas Plants were forecasted to decline by 27%.

Table 1

Figure 1

Consumer Confidence: The 3MMA Present Situation Index recorded a score of 118.3 on this month’s US Conference Board Consumer Confidence Index, up 14% y/y. However the Expectation index declined 1.3 points or 6% over the same timeframe resulting in the Composite Index falling 1.7 points over the past 12 months, (Figure 3).

The present situation score was the best since last September supported by a low unemployment rate and strong stock market growth, resulting in consumers feeling good about themselves. For reference, twelve months ago the present situation index was 104.0, 14.3 points lower than the current value. Expectations for the future on the other hand are quite weak versus a year ago with the vast majority surveyed not expecting to see their wages rise despite the low unemployment numbers. Overall purchase intentions were down from this point last year. Automobile buying intentions within the next six months fell one point, home buying plans also fell one point and appliance purchase intentions declined by 3.8 points from the same timeframe a year ago.

Figure 3

Global Steel Production in June: Production in the month of June at 135,720,000 metric tons was down by 2.7% from May and the three month moving average, (3MMA) that we prefer as a measure, was down by 0.6% month / month. Capacity is 2.3 billion tonnes per year and the 3MMA of capacity utilization in June was 70.7%. Figure 4 shows monthly production and capacity utilization since January 2000. Since the recession, capacity utilization has been on a steadily downward trajectory with an upward blip in the last four months. Capacity utilization in the three months through June at 70.7% was down from 72.7% in three months through June last year. It is necessary to look at the year over year change in the three month moving average to get the real picture of changes in output and on this basis June was disappointing, meaning that production has almost ceased to decline. Figure 5 shows the change in growth rate since January 2005. Production began to contract in March last year and the contraction accelerated through January this year when it reached 5.8%. In the last five months the rate of contraction has declined and reached -0.2% in June. It looks as though we will be back to year over year expansion in the third quarter of this year.

Table 2 shows global production broken down into regions and also the production of the top ten nations in the single month of June and their share of the global total. It also shows the latest three months and twelve months production through June with year over year growth rates for each. Regions are shown in white font and individual nations in beige. The world as a whole has negative growth of 0.2% in 3 months and negative 3.0% in 12 months through June. If the three month growth rate exceeds the twelve month we interpret this to be a sign of positive momentum, and in this case a slowdown in contraction. Momentum was negative for over 12 months through February, became positive in March at 0.2%, and was positive 2.3%, 2.9% and 2.8% in April, May and June respectively.

China’s production after slowing for 13 straight months on a 3MMA basis year over year returned to positive growth in May and June and accounted for 51.2% of global production in June. China’s growth momentum was 3.4% in June. The slowdown in Chinese steel production that has been much written about and welcomed is NOT happening. To put this into perspective with the rest of the world, on a 3MMA basis year over year through June, China had positive growth of 1.3% as the rest of the world contracted by 1.7%,

On a regional basis in 3 months through June year over year, South America and the EU declined by 14.1% and 5.6% respectively. Asia as a whole was up by 1.1%. Other Europe, (mainly Turkey), the CIS and North America had positive growth of 5.0%, as reported in the latest data. North America was up by 0.5% in total with the US up by 1.6%, Canada down by 1.5% and Mexico up by 0.7%.

Figure 4

Figure 5

US Vehicle Sales and NAFTA Vehicle Production, June 2016: Light vehicle (LV) sales in June were 16.7 million units, down from 17.4 million in May and from 17.0 million in June last year at a seasonally adjusted annual rate. In the last three months the percentage of light trucks in the mix has been > 59% for the first time since the summer of 2005. believes that based on fundamentals, light vehicle sales should be about 16.5 million units. The June data brings light vehicle sales closer to that number. Through the end of the year, sales will likely continue in a downward direction. Import market share in June was 21.6%, down from 22.4% in May.

Light vehicle, (LV) production in NAFTA for June was at an annual rate, (not seasonally adjusted) of 19.565 million, up from 17.486 in May and an all-time high. Total production in 2015 was 17.36 million units and in the first six months of this year was 18.1 million units annualized. In July total assemblies will decline by as much as 30% when shut-downs for maintenance and re-tooling occur, though Ford has announced that it will shorten the break for some of its SUV assembly plants in the US and Canada from two weeks to one to keep up with increased demand.

On a rolling 12 months basis y/y through June, LV production in NAFTA increased by 3.4% which was the same as 12 months through May and is consistent with the growth experienced in the last 12 months as indicated by the green bars in Figure 6. On this basis production has been at an all-time high for the last five months. On a rolling 12 months basis y/y the US was up by 3.6% with negative momentum, Canada was up by 8.0% with positive momentum and Mexico was down by 0.1% with negative momentum, (Table 3). Mexico has had negative momentum for fourteen straight months as Canada has had very strong momentum for the last six months. The US has gained production share in the most recent 3 ½ years, (Figure 7) at the expense of Canada. Mexico’s share has been fairly flat for five years and has declined in 2016. In June on a rolling three month basis, the US production share of total light vehicles was 67.8%, down from 68.5% in May, Canada’s was 13.5%, (down 0.2%), and Mexico’s was 18.7%, (up 0.9%).

Ward’s Automotive reported this week that total light vehicle inventories in the US increased by 7 days to 66 days in June, which was 6 days more than June last year. Month over month FCA (Fiat Chrysler Automotive) was up by 10 days to 81 days, Ford was up by 5 days to 78 and GM was up by 5 days to 72 days. The inventory build is in preparation for the summer retooling shutdowns.

Figure 6

Table 3

Advanced Durable Goods Orders: New orders for durable goods fell 4% in June from May, totaling $220 billion, the largest month over month decline so far this year. Orders have declined four of the six months this year, and were down 7.1% compared to June 2015 when new orders totaled $237 billion, (Figure 8).

The official news release from the Census Bureau on July 27th, reported declines in most categories. Transportation equipment (-10.5%), capital goods (-12.3%), and manufactured good (-5.8%) together dragged June’s numbers down a collective $28 billion m/m. As a subcategory of transportation equipment, the largest impact was in orders for nondefense aircraft and parts, down 59% in June from May, a decline of $9.6 billion. Capital goods orders were influenced by contraction of defense capital goods (-20.7%) and nondefense goods orders (-11.3%) m/m.

Bright spots this month were increased orders for motor vehicles and parts up $14 billion, +2.6% m/m, and a modest increase in orders for electrical equipment and appliances up $79 million, +0.8% m/m. Figure 9 illustrates the monthly trend since January 2010, and shows the impact of new durable goods orders on the US manufacturing industry. As reported last week, US manufacturing productivity was flat, up 0.3% m/m, and operated at 75% of capacity, The Federal reserve attributed the incremental manufacturing rise to output of motor vehicles.

Figure 8

Steel Demand Indicators: Table 4 is a snapshot of the market situation on 7/27/2016. Indicators updated since we last published two weeks ago are shaded beige. In most cases this is not July data but data that was released in July for previous months, the actual month to which the data relates is shown in the second column. Of the 27 indicators under consideration, the present situation of 4 are positive by historical standards, 11 are negative and 12 are neutral. This was no change since our last update of June 16th.

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 July 27th 2016. The number of indicators trending positive in this latest analysis was 16 with 11 trending negative. This was an increase of one positive and a decrease of one negative since our last update. The reversal was in the Chicago Fed National Activity Index, (CFNAI). This index is still in negative territory but was less so in June than in the May, data both reported as 3MMA m/m. The most significant change in this latest data was that the nonresidential construction square footage, reported by Dodge Analytics, took a major turn for the worse. In May the volume declined by 6.6% as a 3MMA y/y. In June it declined by 17.4%. This is a leading indicator for non-residential construction ongoing expenditures as reported by the Commerce Department in their CPIP update.

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 eight are trending positive, and four negative. This was an increase of one positive and a decrease of one negative since our June 16th update. The change was in the CFNAI as described above. In summary the present situation is historically weak but trends are good which leads us to have confidence in the long products business environment through the 3rd quarter. (Explanation of Indicators).

Table 4

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