Weekly Market Update - October 29, 2015

Industrial Construction Starts: Total expenditure starts data for industrial construction continued its decline that began mid-year. On a rolling 3 month basis, total expenditures have declined for 5 months in a row. Industrial Information Resources (confirmed projects) estimates that spending (rolling 3 months) will continue to fall for an additional 7 months taking us to June 2016 before rebounding. Short-run expenditures have been extremely volatile, especially since 2012, (Fig. 1) but have been trending higher since the early-2000’s. Expenditures have fallen off the trend line several times over this period only to post large positive spikes. The question now is the “bull run” over or has the energy price plummet resulted in a lower expenditure “new normal”?

For the 3 months ending October, national construction industrial starts plummeted 30.6%. On a y/y basis starts fell 5.8% resulting in strongly, (-24.8%) negative momentum. The biggest change from the three month to y/y comparison was for Production Oil & Gas; up 66.2% on a twelve month y/y basis but crashed 93.8% on a 3 month y/y comparison. Many other project categories are off large double digits to include: Petroleum refining, chemical processing and metals & minerals, (Table 1).

Table 2 presents a regional summary. The Southwest region has been and continues to be the largest recipient of industrial cash outlays, representing 39% of the total spend over the past 12 months. However that ratio has fallen to just 19.8% on a 3 month y/y comparison. Over the past year expenditures in the Southwest grew a modest 0.9% but on a 3 month y/y basis are down 66.4%. The fallout in energy prices are having a disproportionately large impact on this region since much of the oil and gas extraction and refining projects reside there. Fig. 2 shows the massive growth spurt that began in the Southwest in 2013 which has now begun to reverse. The shaded region of the chart depicts confirmed projects starts for the balance of 2015 and all of 2016 by Industrial Information Resources.

Regions of the country recording solid 3 and 12 month y/y growth include; The Northeast, Midwest and the Mid-Atlantic. All of these regions plus the Rocky Mountains are currently enjoying positive momentum. Fig. 3 presents historic starts and a fourteen month forecast for the Northeast. Note the Y scale difference vs. the Southwest chart, smaller by a factor of 5.

Fig 1

Table 1

Non-residential Construction Starts: Total square-foot starts data for non-residential construction (NRC) per Dodge Analytics were off sharply 3 months y/y after posting +0.3% growth on a y/y metric. Momentum is negative 12.9% indicating a significant slowdown in activity which is evident from all of the “red” on Table 3. Only 3 of 14 project categories show growth on a 3 month y/y basis to include: apartments >4 stories, transportation and religious buildings. The largest (by square-feet) category continues to be apartments > 4 stories (more on this in housing report below), the next five largest project categories are off by double digits 3 months y/y. These include: Warehouses (-10.9%), educational (-25.6%), parking garages (-19.8%), retail (-17.2%) and offices & banks (-28.6%). Fig. 4 illustrates the decline in starts activity both with and without apartments >4 stories. The decline is more pronounced for the blue-line representing NRC without apartments, exemplifying the strength in demand for apartment structures.

Studying a few specific examples, Fig. 5 shows the history of educational starts. There was a sustained period of growth from October 2013 until March 2015. Since that point growth has been negative 3 months y/y, with the 3 months ending September off 25.6% compared to the same timeframe last year. Fig. 6 studies manufacturing buildings, red hot throughout 2014 and the first 3 months of 2015. Since then recording 5 consecutive monthly declines 3 months y/y including a 30.6% dip for the 3 months ending September. Offices and banks struggles to recover since the great recession ended, finally began to show signs of a slow but steady comeback starting in 2012. This sector posted 22 consecutive months of y/y growth 3 months y/y through April of this year. It has since recorded 5 months of double digit declines, (Fig. 7). On October 15th the Federal Reserve reported a weak outlook for US manufacturing attributing this to declines in both average work week as well as prices for inputs and finished goods. However, in its survey, 53% of manufacturing firms surveyed did expect future actively to improve over the next 6 months.

It is clear the NRC sector has entered a period of decline which began in the 2nd quarter and has progressed since then. The question remains, is this a temporary lull or have we reached the peak for this NCR building cycle. The next few monthly results will reveal the answer, stay tuned.

Table 3

Fig 4

Housing Permits, Starts, Inventory and Foreclosures: Table 4 examines housing permits and starts by region and nationally. Total starts in September were at an annual rate of 1,206,000 with a three month moving average, of 1,163,000. The 3MMA decreased from 1,165,000 in August. On that basis, single family at 740,000 was up by 2.4% month over month and up by 14.0% year over year but is still 59.4% below the peak of late 2005. Single family housing has averaged 698,000 units on an annualized basis thus far in 2015, its best year since 2007. Multifamily, (apartments & condominiums) were down 4.4% m/m but up 13.2% y/y, (Fig. 8). The Census department results are seasonally adjusted and the monthly numbers are annualized.

Permit data is useful as a forward look at starts. If permits exceed starts then we anticipate an acceleration in construction starts and vice versa. Total permits had increased from March through June then dipped in July to 1,130,000 in July rebounded to 1,161,000 in August and fell-back to 1,103,000 in September. The 3MMA of permits ending September was 32,000 lower than starts indicating a slight slowdown in future completions. Breaking this out between single family and multi-family, we see a deceleration of 54,000 single family start and an acceleration of 22,000 apartments.

The West is showing the largest growth in percentage terms with permits up 20.6% y/y for both single and multi-family and starts up 15.7% on single and 16.2% for multi-family. The Northeast is posting a drop of 6.8% in permits y/y (0.6% for single family and 11.9% for multi-family), but a 14.9% y/y growth in starts indicating a slowdown in future completions. Fig. 9 presents historic growth by region going back to the year 2000. While the South has the greatest volume and appears to exhibit the strongest growth it is the Northeast that is growing the fastest in percentage terms at 24.1% YTD y/y. The West is next at 17.1%, followed by the South at 8.0%. The Mid-West has thus far shrunk by 4.3% YTD y/y.

Fig. 10 studies the ratio of single family to multi-family residences. This ratio has been in continuous decline since peaking at seven in 2010, it now averages less than two and the demand for apartment continues to be strong.

In August, (latest data available) the S&P / Case Schiller 20 city home price index was up by 4.7% y/y with slight positive momentum. After steadily declining for four years, foreclosures increased in March through August this year to a level not seen since Q4 2013. For the seven months ending September there were a total of 1,068,000 foreclosure filings up 4.7% y/y, (Fig. 11). Months of inventory on hand has risen to about five months over the past six months, (4.8 months for new and 6.5 months’ supply for existing homes). This is up from just over four supply at the start of the year. The generally accepted “rule of thumb” is that less than 6 months is a level where builders continue to construct new dwellings, (Fig. 12).

Table 4

Fig 8

Fig 9

Consumer Confidence: The Consumer Confidence Index tumbled in October to 97.6 from 102.6. The 3MMA came in at 100.5, among the highest since mid-2007, (Fig. 13). This reading is up 4% on a y/y basis and has been above 90 for the 15th straight month.

The Present Situation sub-index plummeted more than 8 points in October to 112.1 from 120.3. This is the largest monthly decline in nearly three years. Despite the fall, this figure is up 19% on a y/y basis; the 3MMA rose to 116.1 from 113.4 thanks to September’s reading. The Expectations sub-index also experienced a decline in October falling to 88.0 from 90.8. This sub-index has fallen 9% since the beginning of the year.

Labor market conditions fell across the board in October. Those consumers expecting plentiful jobs trimmed 2.6 points to 22.2 from 24.8. Similarly, more consumers are expecting that jobs are harder to obtain. Fewer consumers expected an increase in income and more expected a decrease in October than in September, reversing a rosy picture that was painted last month signifying an uptick in the labor market. Buying plans were mixed as plans for Homes increased to its highest level since November 2014 meanwhile Auto plans declined to 10.6% from 13.1%, its lowest reading since Q2 2014. Consumers are unsure about the confidence in the marketplace in October. Buying expectations were mixed while overall conditions were down. Inflation expectations remained subdued as the Fed Reserve did not raise interest rates on their October 28th meeting.

Fig 13

Durable Goods orders, seasonally adjusted, declined for the second month in a row, (Fig. 14). September’s advanced reading fell 1.2% from August along with August’s month on month change was revised downward to 3.0%. September’s reading was down 4.6% on a y/y basis. The total dollar value was $231,080 million. Nondefense aircraft and parts plummeted in September with a 35.7% drop. This category typically shows volatile readings. In a bright spot on a negative report, fabricated metal products grew 1.7% and communications equipment rose 2.4%. Nondefense capital goods, excluding aircraft, a component that’s a widely used indicator of business investment in GDP calculations, declined for the second month in a row, falling 0.3% and 1.6% in September and August, respectively. This category is down 4.2% on a y/y basis.

Fig 14

GDP Q3 1st Estimate: The Bureau of Economic Analysis, (BEA) released the third estimate of Q2 2015 Annual Revision of the National Income and Product Accounts this morning.

The annualized growth rate in the 1st estimate of the 3rd quarter was 1.49%, down from 3.91%, in the 2nd quarter. GDP is measured and reported in chained 2009 dollars and in the first estimate of Q3 was $16.394 trillion. Fig. 15 shows the headline quarterly results since 1990 and the latest IMF forecast through 2020. In their October revision, the IMF downgraded their forecast of US growth in 2015 from their April estimate of 3.14% to 2.57% and downgraded 2016 from 3.06% to 2.84%. Historically it has been necessary to have about a 2.5% growth in GDP to get any growth in steel demand so this forecast suggests a status quo through next year for our businesses.

Fig. 16 shows the change in the major subcomponents of GDP in Q3 2015. Personal consumption was dominant in the 3rd quarter and the change in private inventories was a major detractor. Declining inventories have a negative effect on the overall GDP calculation. Fig. 17 shows the same data as Fig. 16 extended back through Q1 2007 and describes the quarterly change in the six major subcomponents of GDP. The last time that inventories made a major negative contribution was Q1 2014 and in the latest data the inventory component was the worst since Q4 2012. Net exports which made a negative contribution in Q4 2014 and Q1 2015 were almost a wash in Q3. The contribution of personal consumption at 2.19% was down from 2.42% in the 2nd quarter. Personal consumption includes goods and services, the goods portion of which includes both durable and non-durables. Government expenditures contributed 0.3% to growth in Q3 down from 0.46% in Q2. The contribution of fixed residential investment at 0.30% in Q3 has been fairly consistent for the last six quarters. The contribution of fixed nonresidential investment has been more variable and declined from 0.53% in Q2 to 0.27% in Q3. Inventories which had contributed positive 0.02% in Q2 contributed negative 1.44% in Q3. Over the long run inventory changes are a wash and simply move growth from one period to another. Fig. 18 shows the breakdown of the $16 trillion economy.

Fig 15

Fig 16

Rig Counts and Energy Prices: After a partial recovery in 2011 and 2012 the decline in the gas rig count has continued. The collapse in the oil rig count didn’t begin until October 10th last year following the oil price decline that began in June last year. Fig. 19 shows the Baker Hughes US Rotary Rig Counts for oil and gas equipment through October 23rd. The total number of operating rigs in the US and Canada on October 23rd was 977. Since March 20th the number of active rigs has ranged between 1,207 and 953 and was down by 58.5% y/y. The US at 787 on October 23rd was down by 51 in the last month and Canada at 190 was up by 14. On a regional basis in the US the big three states for operating rigs are Texas, Oklahoma and North Dakota. Texas at 346 on October 23rd was down by 16 in the last month, Oklahoma at 90 was down by 15 and North Dakota at 63 was also down by 3. Fig. 19 shows that after a brief uptick in oil rigs in the US this summer the decline has returned to its earlier trajectory. The gas rig count continues to decline and in the last six weeks has been below 200 for the first time since our data stream began in January 2008.

Fig. 20 shows historical gas and oil prices since January 2000. The daily spot price of West Texas Intermediate closed at $45.91 on October 17th, according to the latest daily figure available from the Energy Information Administration, (EIA). Brent closed at $47.51 on the same day. WTI was down from $46.67 in 30 days and down from a recent high of $59.53 on June 15th. The EIA reported on October 21st that crude oil inventories rose for the fourth consecutive week, up 8 million barrels for the week ending on October 16, bringing total stockpiles to 476.6 million barrels. The prior week inventories rose by 7.6 million barrels. These are the highest inventory levels since April 2015. The stockpiles of US crude oil rose for the fourth consecutive week. Natural gas delivered to the Henry Hub in Louisiana has been hovering in a fairly narrow range all year with a slight downward trend to close at $2.48 October 16th. U.S. power stations are now reported to be generating more power from natural gas than from coal for the first time ever. The price of natural gas has never recovered from the collapse that occurred during the recession and was followed in late 2008 by a rapid decline in the gas rig count.

Fig 19

Fig 20

Steel Demand Indicators: Table 5 is a snapshot of the market situation on 10/27/2015. Indicators updated since we last published two weeks ago are shaded beige. In most cases this is not October data but data that was released in October, the actual month to which the data relates is shown in the second column. Of the 26 indicators under consideration, the present situation of 6 are positive by historical standards, 8 are negative and 12 are neutral. This was an increase of one negative, of one positive and a decrease of two neutral since our last update on October 15th. The change we made were as follows; the 3MMA of consumer confidence broke 100 and we re-classified from neutral to positive. The capacity utilization of the long product mills fell below 78% and we re-classified from neutral to negative. On October 27th of the 12 leading indicators, 2 were positive, 3 were negative and 7 were neutral. This was an increase of one positive since our last update on October 15th.

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 October 27th. The number of indicators trending positive in this latest analysis was thirteen which was a decrease of two since October 15th. At 50% of indicators trending positive and 50% negative, this was the worst result since December 2012. Capacity utilization which had been trending positive since April 30th reversed course in the September data. Nonresidential building construction starts as reported by Dodge Data Analytics contracted by 12.6% in three months through September y/y. This was the worst result since April 2010 as non-residential began to climb out of the pit of the recession. Of the leading indicators four are trending positive and eight negative this was a decrease of one positive since October 15th.
(Explanation of Indicators).


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