Weekly Market Update - October 23, 2014

Automotive Sales and Production and Inventory, September 2014: Vehicle sales in the U.S. declined in September to 16.4 million units from the unsustainable 17.5 million rate in August. The mix was 7.7 million units of autos and 8.7 million of light trucks both on a seasonally adjusted annualized basis. Moody's Analytics expects vehicle sales to remain well above 16 million units in the near term and approach 17 million units in 2015.

Total light vehicle production in NAFTA in September was at an annual rate of 17.8 million units with a mix of 7.5 million of autos and 10.3 million of light trucks and up by 4.1% from August. Note: these production numbers are not seasonally adjusted, the sales data reported above are seasonally adjusted. On a rolling 12 months basis y/y light vehicle production in NAFTA increased by 5.1% in September and is now well above the pre-recession peak, (Fig. 1). Growth has been solidly in the 5.5% range since August last year. On this basis the U.S. is up by 6.9%, Canada is down by 2.3% and Mexico is up by 4.4%, (Table 1). For NAFTA as a whole on a rolling 12 month basis year over year, light truck production is up by 10.2% and autos are down by 1.2%. The mix of light vehicles is very different by country. The percentage of autos in the Mexican mix is over 60% but only 37% in both the US and Canada. The U.S. production share has been increasing for almost four years at the expense of Canada, Mexico’s share has been virtually unchanged in that time period.

Ward’s Automotive reported last week that total light vehicle inventories in the U.S. increased by nine days of sales in September to sixty four days. This is two higher than in September last year. Inventories of the Detroit three increased by eight to seventy seven, the Asian manufacturers increased by eleven to fifty three, and the Europeans declined by two to fifty one.

  Fig 1

Table 1

Global Steel Production and Capacity Utilization, September 2014: For the month of September production was 134.421 million tonnes down from 135.167 in August. This was a seasonal effect, due to one less day in the month. Since January 2008 on average, September monthly production has declined by 0.37% from August. This year September declined 0.55% from August. The three month moving average, (3MMA) of production in September on an annualized basis was 1.625 billion tonnes and a capacity utilization of 75.0%, (Fig. 2). Capacity is now 2.148 billion tonnes. Table 2 shows regional production in the single month of September with regional share of the global total, also three months production through September and YTD production. Regions are shown in white font and individual nations in beige. In three months through September y/y global growth was 1.1%, down from 2.8% in three months through August. Year to date growth through September was 2.0% down from 2.4% in YTD through August. All regions except the CIS and South America had positive y/y growth in three months through September. The European Union which had the fastest growth rate in early 2014 continued to slow and achieved only 0.4% in three months through September. Year over year growth of output in the NAFTA was 2.2% in three months through September with the U.S. at 2.4%. Canada achieved 7.0% and Mexico contracted by 0.8%. South America had negative 3.2% growth through September with its largest producer, Brazil down by 1.6%. Growth in Asian production was 1.6% once again led by South Korea at 10.0%. In the single month of September, China’s production was exactly the same as September last year, in three months through September China’s production grew by 0.9% y/y and YTD was up by 1.9% y/y. This may be evidence of the much anticipated slowing in the growth of China’s production. The YTD growth of global production compared to last year steadily increased from 2.0% in April to 2.8% in August then returned to 2.0% in September.

Fig 2

Table 2

Housing Starts: The three month seasonally adjusted moving average for annualized housing starts was 882,000, consisting of 646,000 single family homes and 378,000 multi-family units. Overall housing starts were up 16.2%, 3MMA y/y with a significantly higher percentage increase for multi-family builds, 33.4%, 3MMA y/y for multi-family vs. 7.9%, 3MMA y/y for single family. Building permits rose 13.5%, 3MMA y/y overall but just 1%, 3MMA y/y for single family, (Table 3). The Northeast posted the largest y/y home construction gain in percentage terms, up 21.4%, 3MMA y/y, however building permits were only up 2.7%, 3MMA y/y. The South recorded the largest number of starts, 497,000 for an 18.1%, 3MMA y/y increase. Building permits in the South were up 7.0%, 3MMA y/y. The Midwest witnessed a 7.6%, 3MMA y/y, permits were up 4.7%%, 3MMA y/y. The West posted a 15.9%, 3MMA y/y increase to 233,000. Permits were up 4.2%, 3MMA y/y, (Fig. 3).

According to the Federal Reserve’s second quarter financial accounts report, U.S. households are wealthier and are now borrowing more confidently. Household wealth increased by $1.39 trillion to $81.49 trillion in the second quarter of 2014. Wealth has risen in every quarter but two since the recession ended in mid-2009, with quarterly gains averaging $1.61 trillion. Thus far, the recovery in residential construction has been driven by falling rental vacancy rates creating a surge in multifamily construction, meanwhile single-family housing construction has barely budged. While the increase in multi-family home construction is welcome, it results in less employment and GDP boost compared with single family home construction. Per Moody’s, each single-family home constructed adds 3.7 jobs in the following year, compared with 1.8 jobs for multifamily construction. Thus the decline in the ratio of single family to multi-family is of concern to net job creation. Fig. 4 illustrates the dramatic change in the ratio of single to multi-family homes since from the 2000 to present. The ratio ranged from four to six single family to one multi-family. In the recession years this ratio fell to two before skyrocketing north of seven in late 2010. Since that time the ratio has continuously fallen and now hovers around two and is still declining. A significant contributing factor is the slow job creation and low wage growth thus far into the recovery. First time buyers, generally younger people are choosing to rent for a myriad of reasons to include: Having large student loans to be repaid, insufficient down-payment, tight loan underwriting standards and the memory of the 2008/9 housing crash.

U.S. foreclosures continued to trend downward and prices continue to trend in an upward direction, although neither have reached its pre-recession low/peak, (Fig. 5). According to economagic, the median price of a U.S. home was $275,600 in August, right at its 12 month average. Home inventory levels have been fairly consistent for the last six months and at a level that historically has promoted continued new home construction, (Fig. 6).

Table 3


  Fig 3

Fig 4

Industrial Production: The U.S. Industrial Production Index measures the monthly output from four industries: mining, manufacturing, gas, and electric. Its baseline is 2002 = 100. The seasonally adjusted figure in September was 105.0728, the highest on record dating back to 1993. The Index rose 4.3% y/y and has been above 100 for the twelfth consecutive month. It also rose after August’s first decline since January, during the depths of the winter season. The three month moving average was 104.43, also the highest figure on record. September’s reading is up 26% since June 2009, the lowest measure and last month during the Great Recession.

As industrial production has recovered and seeing all-time highs, total steel supply has yet to make a comeback from the depths of the recession; however, it has started to experience monthly averages that were prevalent before the onset of the crisis. August’s total steel supply was 9.8 million, down from July’s seven year high of 10.1 million, and the sixth consecutive month above 9 million tons. As the construction and manufacturing industries continue to expand throughout the end of the year, total steel supply will more than likely follow suit. Historically there has been a 70% correlation between the two data sets, (Fig. 7)

Fig 7

Employment Situation: Net job creation for September totaled 248,000, the third highest job total of 2014. Net job creation for July and August were revised upward from 212,000 to 243,000 and 142,000 to 180,000, respectively. This was 69,000 more jobs than reported in the original release. The unemployment rate fell to 5.9%, the lowest in more than six years. Labor Force Participation fell for the third straight month to 62.7 from 62.8. This may be statistically insignificant, however, this ratio hasn’t dipped below 62.8 ever on record dating back to 1980, (Fig. 8). The employment to population ratio has stayed constant at 59.0 since the end of the recession in 2009.

Unemployment by duration tracks the length of unemployed persons in the United States into four categories: less than 5 weeks, 5-14 weeks, 15-26 weeks, and 27 and higher. The long term unemployed, 27 weeks or more, has fallen in recent months but is still far above the historical normal percentage, which is below 20% of all unemployed. In September, this category contained 31.9% of all unemployed persons. They also lead the unemployed by duration as a percentage of all unemployed, (Fig. 9). Net job creation has picked up steam over the past 24 months, averaging 207,000 jobs in this time. Inflation has remained consistently below the 2% target and could hamper economic performance, according to the FOMC members. The long term unemployed (six months or longer) and involuntary part time workers have decreased only slightly and wage growth has stagnated, well under 2% y/y, since the end of the recession leading to a considerable amount of slack in the labor market, (Fig. 10).

Fig 8 

Fig 9

Architectural Billings Index: The ABI score was 55.2 in September, up from 53.0 in August. Regional averages were: South 55.3, Midwest 55.1, West 54.2 and Northeast 51.0, (Fig. 11). A score greater than 50 denotes expanding billings which indicates expanding demand for design services. History has shown that increased demand for design services translates to increased non-residential construction activity 12 to 18 months in the future. Referencing comments from Kermit Baker, AIA Chief Economist: “Strong demand for apartment buildings and condominiums has been one of the main drivers in helping to keep the design and construction market afloat in recent years,” said AIA Chief Economist Kermit Baker, Hon. AIA, PhD. “There continues to be a healthy market for those types of design projects, but the recently resurgent Institutional sector is leading to broader growth for the entire construction industry.”

Fig 11

Long Product Shipments, (SMA): Total long products (rebar, beams, structurals, merchant products), apparent domestic consumption (ADC = Domestic mill shipments + imports), grew 9.1% y/y and 9.5%, 3 months y/y ending September 2014. All products posted growth. Beams recorded the strongest y/y growth, up 12.8%, 3 months y/y and 13.1% y/y. Angles and channels posted 10.8% y/y growth and a stronger 14.5%, 3 months y/y. Rebar shipments were up 9.1%, 3 months y/y and 10.3% y/y. Overall momentum held positive by 0.4% but wire rod and other structural shapes momentum slipped by 5.9% and 0.2% respectively, (Table 4).

U.S. mill shipments (domestic shipments + exports), were up 6.6% 3 months y/y and 5.4% y/y ending September and momentum was positive. Wire rod posted the best performance up 14.8%, 3 months y/y and 2.4% y/y. Merchant bars advanced modestly, up 1.5%, 3 months y/y and 1.1% y/y. Year to date long product import market share was 18.7% for the month, 1.0% below the YTD average of 19.7%. In 2013 the average import market share was 17.6%. It was 14.5% in 2012 and 12.2% in 2011, (Fig. 12).

Table 4

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