Weekly Market Update - September 29, 2016

Chicago Fed National Activity Index: After recording a +0.24 reading in July, the CFNAI fell to negative 0.55 in August. At Gerdau, we prefer to look at the data on a 3 month moving average (3MMA) basis as it smooths out the volatility which occurs with monthly data releases and gives a truer picture what’s going on in the economy.

The 3MMA came in at negative 0.07, 6MMA at negative 0.24 and on a 12 MMA the CFNAI measured a negative 0.21. These negative values denote that the US economy has been performing at well below its long term average, (> 0.0 means above trend growth, <0.0 means below trend growth). There are four sub-indexes in the overall CFNAI, these include: The 3MMA Production and Income index fell to negative 0.02 dragged down by the negative 0.33 reading in August. The 3MMA Sales Order and Inventory and Personal Consumption indexes were also recorded negative readings in August of -0.02 and -0.06 respectively. The only positive reading was for Employment Unemployment and Hours which posted a +0.02 3MMA, (Figure 1).

Figure 2 overlays long product domestic shipments and imports onto the CFNAI. Note that prior to the recession the blue line (long product market size) was generally higher than the CFNAI and after the recession ended, the blue line is consistently below the CFNAI. We think the reason for the shift can be explained by the long slow recovery of non-residential construction (NRC). The blue line in Figure 1 depicts personal consumption and housing. This line was slow to recover but is now trending up and appears that will intersect the 0.00 CFNAI threshold in late 2017, assuming the current slope continues at its present trajectory. Historically a housing build cycle followed a recession, preceding a strong boost in NRC expansions by a year or so. This was not the case after the great recession as both housing and NRC rebounded very slowly, not seemingly connected any longer. In a hopeful sign, both the CFNAI (3MMA) and the Long products market are moving higher in lock-step over the past four months.

Figure 1

Figure 2

Non-residential Construction (Dodge Analytics): Nationally overall square foot starts fell by 15.4%, 3 months y/y, after declining in nine of the past twelve months on a 3 months y/y metric. Every project category except offices & banks and medical recorded declines and overall momentum was negative.

However if we examine Dodge starts in inflation adjusted dollar terms, we get a markedly different result. On a 3 month y/y basis, starts are up 7.6% and momentum is at +22.2%. On a 12 month y/y basis $ starts declined by 14.6%. The obvious question is why the big difference between the two metrics? Part of the answer is that square foot starts only include projects that are “under-roof” and do not include projects like bridges, power plants, transmission lines, sewage treatment facilities etc. Additionally, square foot starts do not include renovations and remodeling unless it adds square feet, while the expenditure comparison does include renovations and remodeling. Table 1 presents both square foot starts and $ starts for both the 3 and 12 month periods ending August as well as the percent change year on year in both cases. To get an “apple to apple” comparison we removed the project types that are not under roof to create Table 2. Renovation and remodeling expenditures remain within the expenditure data. The total expenditures fell from $206,310 million over 12 months to $128,575 million, a 37.7% reduction, indicating the significance magnitude that these heavy industrial and infrastructure projects have on total expenditures. However, removing these projects did not change the 3 month y/y change very much. For example: Parking structures in square foot terms were down 4.2%, 3 month y/y and down 4.3%, 12 months y/y in square feet, but are up 9.8% and 4.6% for 3 and 12 month y/y comparisons in $ terms.

Figure 3 charts inflation adjusted $ starts on the left Y axis and square feet starts on the right Y axis from 2002 to present. The “fit” of the two lines with a correlation coefficient of 0.75 indicates that our $ inflation adjustment is pretty good. The sharp spike in the $ starts value in August relative to the much smaller increase in square feet is contributing to the dissimilarity in the percentage y/y values presented in the tables above.

Figure 4 charts the same data on a 12 month moving average to smooth-out the volatility so we get a clearer picture of what the data is telling us. A few observations: It appears that $ starts leads square foot starts for most of the cycle. In the period from 2008 to 2013 there was a much higher ratio of renovation/remodel work that did not add square feet. When examined on a 12 MMA basis both $ and square foot starts are trending down.

Figure 5 plots $ per square feet along with the 12 month moving average. Ignoring the 2008 to 2013 period which has much higher $ per square foot of high renovation/remodeling ratio we see that $ per square foot trades in a fairly narrow range over time. From 2002 to 2008 $ / sq.-ft. averaged $106, from 2008 to 2012, $135 $ / sq.-ft. and from 2013 to present $110 $ / sq.-ft.

Table 1

Figure 3

Figure 4


US Vehicle Sales and NAFTA Vehicle Production, August 2016: Vehicles sales in the US are settling in to a more sustainable pace, but a strengthening labor market, low interest rates, low gasoline prices, and rising incentives are still supportive of strong demand. Light vehicle sales in August declined from the very strong July result of 17.9 million units, (SAAR) to 17.0 million, (Figure 6). Autos declined from 7.1 to 6.8 million and light trucks declined from 10.8 to 10.2 million. The mix in August was exactly 60:40. Import market share rose from 20.7 in July to 21.8% in August. The average import share since January 2014 has been 21.4%.

Total light vehicle, (LV) production in NAFTA in August was at an annual rate, of 20.252 million units, up from 14.281 million in July. On average since 2004, August’s production has been 43.3% higher than July when the auto companies take summer shutdowns for maintenance and re-tooling. This year production rose by 41.8% therefore was quite normal in the long term context. We can expect September through November’s production to be similar to August.

On a rolling 12 months basis y/y through August, LV production in NAFTA increased by 3.0% which was up from 2.4% in 12 months through July and is still consistent with the growth experienced in the last 12 months as indicated by the green bars in Figure 7. On this basis production has been at an all-time high every month in 2016. On a rolling 12 months basis y/y the US was up by 2.9% with negative momentum, Canada was up by 6.0% with negative momentum and Mexico was up by 1.6% with very positive momentum, (Table 3). July and August were the first months for Mexico to have positive momentum after fourteen straight months of slowdown. Canada experienced negative momentum in July and August following very strong momentum in the previous six months. On a rolling 3 months basis, Mexico has gained production share in the last four months at the expense of both the US and Canada. In August on a rolling three month basis, the US production share of total light vehicles was 66.7%, down from 69.0% in April, Canada’s was 12.6%, down from 14.9% in January and Mexico’s was 20.6%, up from 17.4% in April. July and August were the first months for Mexico to exceed 20% since August 2011. Production in Mexico in 2014 was 3.2 million units, in 2015 was 3.4 million units and YTD 2016 through August was 3.417 million units annualized. The Mexican production target for 2020 is 5.0 million units according to Eduardo Solis, president of the Mexican Automotive Industry Association.

Ward’s Automotive reported this week that total light vehicle inventories in the US were unchanged in August at 61 days which was 6 days more than August last year. Month over month FCA (Fiat Chrysler Automotive) was down by 7 days to 74, GM was up by 8 days also to 74 and Ford was down by 5 to 71 days.

Figure 6

Figure 7

Table 3


Industrial Production and Manufacturer’s Capacity Utilization through August: This data from the Federal Reserve is seasonally adjusted and the index is based on the May 2012 level being defined as 100. The Industrial Production Index had an all-time high of 106.70 in November 2014 and trended down until June this year when it experienced a two month turnaround followed by a slight decline in August to 104.402. The three month moving average, (3MMA) had positive month over month growth in June, July and August for the first time since September last year. Figure 8 shows the 3MMA of the index and the y/y growth. In August the month on month growth on a three month moving average basis, was positive 0.2% but the 3MMA growth on a y/y basis was negative 0.76%. This means that momentum is positive since there was a short term (3 months) improvement compared to the longer term, (12 months) decline. Momentum has been positive for 13 straight months.

Manufacturing capacity utilization was 74.82% in August with a 3MMA of 74.99%, (Figure 9). In January last year, utilization exceeded 76% for the first time since the recession and has been slowly declining ever since. Regarding the August result the Fed had this to say; “Capacity utilization for manufacturing decreased 0.4% in August to 74.8 percent, a rate that is 3.7% below its long-run average. The operating rate for nondurables moved down 0.2%; the rates for durables and for other manufacturing declined 0.5%. The operating rate for mining moved up 1.0% to 76.2%, while the rate for utilities decreased 1.3% to 80.4%.”

Figure 8

US Consumer Confidence: In a report released by The Conference Board, a global independent business research association, consumer confidence rose for a second month to 104.1, the highest recorded index since August 2007, (Figure 10). Lynn Franco, the Conference Board Director of Economic Indicators, attributed the increase to low gas prices and strong employment. US consumers had a positive impression of the current economic situation, describing an improved labor market, supported by a low unemployment rate at 4.9% for the last three months, and oil priced below $50 a barrel.

Consumers expect moderate economic expansion in the months ahead, and remained neutral regarding business conditions and prospect of income improvement. Almost 75% of workers expect their incomes to remain steady for the next six months. Consumer spending accounts for almost 70% of the total economic activity attributed to US GDP, a measurement of the overall condition of the US economy, (Figure 11). Subdued gas prices, and subsequent lower food and other durable goods prices bolstered consumers’ outlook, and is expected to boost consumer spending in the coming months.

Figure 10

US Preliminary Steel Long Product Imports: A preliminary count of US long product imports by the Department of Commerce and its reporting division, the Steel Import Monitoring and Analysis system, recorded 587,000 tons (kt) for the month of August, down 3% from July final imports. As shown on Table 4, import licenses for August totaled 559kt, leaving more than 57kt of unused licenses that could be imported during the month of September. As an example Turkey and Taiwan both requested July rebar licenses which under the 75 day rule, were utilized in August and is reflected in the reported rebar import tonnage. Where July imports were short 25kt, August rebar imports were 24kt over what was requested. July was the highest recorded monthly rebar imports, followed by 223kt in August, a month over month decline of 23%. All July unused licenses were shipped in August as expected. Year over year, year to date rebar imports rose 11%.

Wire rod imports rose 25% m/m, with South Korea again not importing all tonnage requested for the month. Unused August and July wire rod licenses, in excess of 12kt, could be imported in September. We will continue to watch this product group in the coming months. Year to date y/y wire rod imports plus August preliminary rose 11% compared to wire rod imports in the eight months through August 2015. Light structural shapes, such as angles and channels, fell 6% in August and are flat YTD, up 1% y/y. Heavy structurals including beams were flat m/m as all unused July licenses were shored during August, as YTD imports totaled 612kt, down 5% y/y. The beam component of this product group fell 36% m/m and was down 10% y/y.

Hot-rolled bars (HRB), as defined by the SIMA, rose in August but did not consume the 20kt of unused July licenses for this product. Portugal requested 11kt during the month of July which have yet to arrive in American ports. Under the US trade laws, Portugal has until September to import this material or lose permission for importation. HRB plus cold finished bar encompass Merchant Bars (MBQ) and Special Bar quality (SBQ) products. Based on the last 24 months of final imports, we extrapolate that MBQ imports rose 29% m/m, while SBQ imports rose 15%. Year over year MBQ imports plus preliminary August imports were down 9% y/y, while SBQ fell 26% y/y.

Table 4

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