Wednesday
Dec212016

Weekly Market Update - December 22, 2016

US Gross Domestic Product by Region and by State Q2 2016: The Bureau of Economic Analysis, (BEA) introduced a new data set for GDP by state and region in 2014 and back dated it to Q1 2005. Last week the data was updated through Q2 2016. Even though we might consider this to be historically “old” we think it’s worth reporting because it is a foundation for where we are now. The data is published quarterly and is reported in chained 2009 seasonally adjusted dollars. Table 1 shows the growth of regional GDP in chained 2009 dollars quarter on quarter. The definition of a recession is two or more quarters back to back with negative growth. Three regions were in recession in the second half of 2012.

The BEA produces a map of the United States showing quarter on quarter growth by state within each region. We have included here the map for Q2, (Figure 1) to show the difference by state which is very significant.

Regions as defined by the BEA are as follows;
New England; Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, Vermont.
Mideast; Delaware, DC, Maryland, New jersey, New York, Pennsylvania.
Great Lakes; Illinois, Indiana, Michigan, Ohio, Wisconsin.
Plains; Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, South Dakota.
South East; Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, Mississippi,
North Carolina, South Carolina, Tennessee, Virginia, West Virginia.
South West; Arizona, New Mexico, Oklahoma, Texas
Rocky Mountain; Colorado, Idaho, Montana, Utah, Wyoming.
Far West; Alaska, California, Hawaii, Nevada, Oregon, Washington.

In the 2nd Q of 2016, the Far West had the highest growth rate at 0.5% the South West was the only region with negative growth. The South West region flipped from the highest growth rate in Q1 2015 to negative growth in Q2 2015 and has had negative growth in three of the last five quarters reported as shown in Figure 2.

The U.S. values in this report are quite a bit different and lower that the official report published in the National Income and Product Account (NIPA) reports partly because the GDP-by-state numbers exclude Federal military and civilian activity located overseas (because it cannot be attributed to a particular state). The official quarterly report of national GDP is also annualized which as we always report in our quarterly analysis increases the value by a factor of four.

Table 1


Figure 1

Homebuilder Confidence in December and Housing Starts through November: Homebuilder sentiment surged in December driving the 3MMA of the regional composite to its highest level since the recession. Confidence improved in all regions, particularly the North East and the West. The composite NAHB index of builder confidence rose to 70, up 7 points from November. Any number > 50 indicates positive confidence. The 3MMA rose from 63.7 to 65.3 (Figure 3). The 25 bp hike in the target interest rate announced by the Federal Reserve last week could put a damper on confidence in next month’s report though this will probably be short lived. The rise in rates won’t have a big impact on monthly mortgage payments but the psychological effect of the anticipated then actual rate increase has affected the number of mortgage applications which fell by 4% last week, by 7% the week prior and by 9.4% the week before that.

The housing market is important as a driver of steel consumption not only for the steel that is actually in a house but for the supporting infrastructure and services such as schools, offices and other services and places of employment. Housing starts have had a minimal rate of growth in the last 18 months. Total housing starts in October were at an annual rate of 1,323,000 which was the best month since the recession but starts declined in November to 1,090,000 with a 3MMA of 1,161,000 (Figure 4). Starts have been range bound since June last year with a low of 1,156,000 and a high of 1,183,000 annualized on a 3MMA basis.

Figure 5 shows the regional situation for the 3MMA of total residential starts since January 2000. There is a significant difference between regions. The South which had been the main growth engine has been flat for over a year, the West has had positive growth this year but the North East and Mid-West have lacked direction.

Figure 3

U.S. Industrial Construction Starts were down 10.1%, to $188.8 Bn (12 month rolling total), compared to December 2015. However, on a 3 month moving total (MMT) y/y basis starts surged 20.7%, subsequently momentum was a positive 30.8%. Three project categories surged by triple digits 3 months y/y to include: Production oil & gas (+510%), Industrial manufacturing (+214%) and Alternative fuel (+126%), (Table 2). Pharmaceuticals & biotech and Chemical processing also posted strongly increased expenditures for the three months ending December, up 75% and 32% respectively.

As Figure 6 illustrates, industrial construction starts in 2016 were close to the long term trend line. Outlays in 2013 through 2014 were well above trend. Confirmed project starts for 2017 indicate that project starts will be stronger than in 2016.

Figure 7 illustrates industrial starts by census region showing the y/y change in percent as well as the 12 month total expenditure. Regions recording double digit declines include; The Southwest (-52.0%), Mountain (-18.8%), the West North Central (-17.9%). In fact the entire center portion of the country recorded negative growth on a 12 month y/y comparison. This area is more heavily impacted by low energy prices and a high US dollar which hurts exports because this is where the bulk of manufacturing and oil & gas extraction takes place. Regions posting significant growth (12 month rolling total and 12 month y/y change) include; New England (+159%), Northeast (+40.4%), West Coast (+43.3%), Middle Atlantic (+22.9%) and the Southeast (+12.5%).

Looking at industrial data on a 3 month rolling total and 3 month y/y change yields a different picture, (Figure 8). The Southwest, West Coast and Southeast have switched colors. Such is the nature of industrial starts, there has always been a vast amount of volatility on a month over month basis and as shown even comparing the numbers on a 3MMT results in a large amount of variation. This is because many of the projects in question have enormous budgets, frequently in the billions of dollars. Recall that a “start” counts the total project expenditure in the month that it is started. In a recent example for Production Oil & Gas in the three months ending July 2016, the monthly expenditures were: $404 million, $6,370 m and $398 m, for a three month total $7,172 m. For the same three months in 2015 for the expenditures for Production Oil & Gas were: $13,029 m, $1,287 m and $4,098 m. Three month total $18,414 m. So the 3MMT y/y change was -61%.

Table 2


Figure 6

Canadian Industrial Construction starts were down 68.5%, 3 months y/y and off 22.7% y/y. Energy related projects were the principal reason for the large reduction with Production oil & gas down 90%. Petroleum refining recorded zero expenditures over the last 3 months. Power, Chemical processing, and Terminals (oil & gas) and industrial manufacturing all posted large double digit declines as momentum tanked 46%. Figure 9 illustrates expenditures in the period between 1994 to present. Since the oil bust, expenditures have plummeted and are now well below the long term trend. The y/y change has been negative for 38 of the past 39 months and the confirmed starts for 2017 continue to be lackluster.

Figure 9

US and Canadian Service Center Shipments: November service center total shipments continued to decline falling 4.4% on a three month moving average basis. (3MMA) y/y and down 15.4%, 3MMA compared to two years ago. Plate shipments fell the most, down 17.4%. Sheet products performed comparatively better, down 0.3% y/y, (Table 3). Overall inventories fell across the board, down 19.0%, 3MMA y/y led down by a 27.4% reduction in pipe & tube. Intake was down in every product group category except pipe & tube which eked out a 1% gain, 3 months y/y. Plate and structurals declined the most, off 15.3% and 9.1%, 3MMA y/y respectively. A slowing manufacturing base, trade actions, weak energy prices and a pause in the non-residential construction sector coupled with short mill lead times have combined to reduce service center shipments, inventory and intake volumes.

Canadian September service centers total shipments were comparatively better than in the US, falling just 1.9%, 3MMA y/y as bar & shapes shipments surged by 26.7%, (Table 4).

Overall inventories levels fell 4.6%, 3MMA y/y, the exception was bar & shapes which rose 4.6%. Intake on all carbon products jumped 18.8%, 3MMA led by a 30.8% surge from bar & shapes and a 31.1% bump from sheet.

Table 3

Architectural Billings Index: The national ABI score for November came in at 50.6, flat with last month, (>50 = expanding billings, <50 = contracting billings). The commercial / industrial sub-index was 50.4, flat with September, while the institutional sub-index scored 49.5. It has now been below 50 for three months running, (Figure 10). Regional sub-indexes were: South (51.3, now 54 consecutive months >50), West (48.6, now two consecutive months <50), Northeast (50.8, first month >50 after 5 consecutive months <50) and Midwest (50.9, first month >50 after two consecutive months <50). The new projects inquiry index was 59.5, up from September’s 55.4 posting. Kermit Baker (Hon. AIA PhD) observed that; “Without many details of the policies proposed, it’s still too early to tell the likely impact of the programs of the new administration. However, architects will be among the first to see what new construction projects materialize and what current ones get delayed or cancelled, so the coming months should tell us a lot about the future direction of the construction market.”

Figure 10