Weekly Market Update - April 28, 2016

Q1 GDP, (first estimate): The Bureau of Economic Analysis released its first estimate of growth in the first quarter of 2016, stating that GDP increased at an annual rate of 0.5%, (Fig. 1). Annualized GDP growth in Q4 of 2015 was 1.4%. Spending on consumption contributed a positive 1.27 points while government spending added +0.20 points. Dragging the numbers down were; Fixed investment (-0.27), Inventories (-0.22) and Net Exports (-0.34), (Fig. 2).

Moody’s states that although 0.5% growth was the weakest growth in two years, the number understates “real” growth in the US economy. One problem has to do a residual seasonal adjustment issue which has been weak for several years. The economy is generating plenty of jobs (>200,000 per month), the longest streak on record which shows no signs of slowing down. Full employment will put upward pressure on wage growth which in-turn will spur stronger consumer spending. In addition, consumer balance sheets are in the best shape they have been in years, leaving leave plenty of room for debt to finance additional consumption. There are however, plenty of headwinds holding back more robust economic growth; Low energy prices which are good for consumers, but bad for energy sector and manufacturing jobs. Slow growth in productivity gains, Absorption of the Affordable Care and Dodd-Frank acts into the financial system. Strong dollar coupled with struggling emerging markets combine to make life tough for US exporters.

Fig 1

Non-residential Square-Foot Starts: Nationally overall starts increased by 5.1%, 3 months y/y, after declining for six months in a row. On a 12 month y/y basis starts fell by 2.3% resulting in positive momentum of 7.3%. Warehouses surged 25.4%, 3 months y/y and were up 5.2% on a 12 month y/y comparison. Warehouse construction has been consistently strong, increasing in 55 of the 56 month y/y. Apartments >4 stories also continue to perform well, up 16.7%, 3 months y/y and 15.4% y/y. Other than a brief pull back at the end of 2015 (measured on a 3 month y/y basis), apartments have recorded positive growth for 66 consecutive months. Other project categories displaying positive growth for the year ending March 2016 include: Hotel/motel, Transportation, Recreation and Food & Beverage. Project groups reflecting a declining performance on a y/y measure include: Parking structures, Educational facilities, Offices and banks, Retail, Manufacturing plants (positive on a 3 month y/y metric), Medical buildings, Civic and Religious construction, (Table 1).

Fig. 3 presents a chart showing starts data on a rolling 12 month basis from 1990 to present for all non-residential and all no-residential excluding apartments and warehousing. This chart illustrates how powerful the impact off apartments (>4 stories or 5 units) and warehouse construction is on the total non-residential market. The latest 12 month total was 1.2478 million square-feet. Of this 0.5084 million square-feet (40.7%) was apartments & warehouses at roughly a 3/2 split. Both lines in Fig. 3 stalled at the end of 2015 and the start of 2016. The most recent data point was positive, hopefully signaling a return to growth.

Table 1

Advance Durable Goods: New orders for durable goods rose 0.8% in March, which was weaker than expected but a nice improvement from Februarys’ -3.1%. On a 3MMA basis (to smooth-out volatility), durable goods increased 0.6%. Orders for volatile aircraft plunged 5.7% following of a large decline in February, while motor vehicles and parts declined 3%. Most capital goods orders were flat as shipments improved by 0.3%. The dollar remains strong yet has fallen back approximately 5% on a trade-weighted basis since its January peak which should help the US manufacturing export sector, (Fig. 4).

Fig 4

Regional Job Creation through March 2016: The states compile their employment numbers independently of the Feds, then both are reported by the Bureau of Labor Statistics. The results are close. In the last thirteen quarters since Q1 2013, the Feds reported total job creation of 8,948,000 and the states reported 8,610,400. There is a difference in these reports that shrinks the small discrepancy. The Feds capture military personnel stationed abroad but the states don’t.

Table 2 shows the history of quarterly job creation by region for the last 5 years. All regions had positive job creation in each of the last four quarters. Problems in the oil and gas industries are evident in these regional employment reports. The South Central region went off a cliff in Q1 2015 after having the highest job creation of any region in the previous quarter. This region rebounded in Q2 through Q4 2015 but is nowhere near where it was before the oil price collapse. In the five quarters since Q4 2014, North Dakota has lost 20,700 jobs, Oklahoma has lost 6,100 jobs but Texas has gained 185,000 jobs. The East North Central region created the most jobs in Q1 of this year followed by the Pacific region. The only region to have had a losing quarter in the last five was the East South Central in Q1 2015.

The regions have fared very differently since the pre-recession high of 1st Q 2008 and since the low point of 4th Q 2009. There are now 5,976,000 more people employed than there were immediately before the recession but of that number almost half occurred in the South Central, and Pacific regions, (Table 3). The 3rd Q of 2015 was the first time that every region had more people employed than it did at the pre-recession peak. Employment is now 14,406,000 positions higher than it was at the low point of the recession. The Pacific has had the largest number of jobs created during the recovery with an increase of 2,853,000 positions which amounts to 15.4% of total employment. The South Central is in 2nd place with 2,061,000 jobs created which is 14.0% of total employment. The East North Central currently has the highest number of employed people with 21,817,000, closely followed by the Pacific with 21,376,000, (Table 4). During the depths of the recession in Q1 and Q2 2009, the East North Central had the highest number of job losses

Table 2

Table 3

Oil and Gas Prices and Rotary Rig Counts. April 2016: Fig. 5 shows historical oil and gas prices since January 2000. The daily spot price of West Texas Intermediate, (WTI) closed at $40.46 on April 11th which was the highest since December 3rd last year according to the latest daily figure available from the Energy Information Administration, (EIA). Brent closed at $41.58 on April 11th. The price of natural gas, delivered the Henry Hub in Louisiana closed at $1.95 / MM BTS on April 8th, up from $1.57 on March 4th. April 8th was the latest data published by the EIA. The price has been trending down for two years and it remains to be seen if this recent increase is just noise. Natural gas is expected to fuel the largest share of electricity generation in 2016 at 33%, compared with 32% for coal. In 2017, natural gas and coal are both forecast to fuel 32% of electricity generation. Working natural gas inventories ended the winter heating season at 2,478 billion cubic feet (Bcf), exceeding the previous end-of-March record high of 2,473 Bcf, set in 2012, according to EIA's Weekly Natural Gas Storage Report.

The total number of operating rigs in the US and Canada on April 15th was 480, down from 830 at the start of 2016 and down from 2,018 on January 2nd 2015. Year over year the total US and Canada rig count is down by 55.4%. Fig. 6 shows the Baker Hughes Rotary Rig Counts for oil and gas equipment in the US through April 15th. The decline in the US oil rig count hesitated in July and August but since then has been continuous, was down by 38 in the last month and this year it has been in free fall. Based on the most recent available data, the EIA estimates that oil production from hydraulically fractured wells now makes up about half of total U.S. crude oil production. U.S. crude oil production averaged an estimated 9.4 million barrels per day (b/d) in 2015, and it is forecast to average 8.7 million b/d in 2016 and 8.2 million b/d in 2017. Following the recession there was a partial recovery in the gas rig count but since early 2012 the decline has been more or less continuous to the point that the number of operating rigs is now lower than at any time since our data began in January 1988.

On a regional basis in the US, the big three states for operating rigs are Texas, Oklahoma and North Dakota. Texas at 192 on April 15th was down from 213 on March 11th and down from 318 at the beginning of the year, Oklahoma at 63 was down from 87 at the beginning of the year and North Dakota at 26 was down from 53.

Fig 5

Fig 6

Vehicle Sales, Production and Inventory, March 2016: Both auto and light truck sales in the US dropped abruptly in March to a seasonally adjusted annualized rate of 16.5 million units, down from 17.5 million in February, Fig. 7. Auto sales fell by 11%, while light truck sales rose 3%. Year-to-date sales are 3% higher than for the first quarter of 2015. In March auto sales were 6.9 million units or 41.8% as light trucks were 9.6 million units or 58.2%, import market share was 20.6%.

Total light vehicle, (LV) production in NAFTA in March was at an annual rate of 18.849 million, up from 18.216 million units in February. Note: these production numbers are not seasonally adjusted, the sales data reported above are seasonally adjusted. On a three month moving average basis, (3MMA) March production was up by 4.5% year over year. LV production in NAFTA on a rolling 12 month basis in March was 17.550 million units, only 841 units less than February which was an at an all-time high, (Fig. 8). On a rolling 12 months basis y / y the US is up by 4.3% with positive momentum, Canada is up by 2.1% with positive momentum and Mexico is up by 2.3% with negative momentum, (Table 5). Mexico has had negative momentum for eleven straight months. The US has gained production share in the most recent 3 ½ years at the expense of Canada although that trend slowed in the last 12 months when Canada picked up the pace. Mexico’s share has been fairly flat for five years and has declined in the last two months. In March on a rolling three month basis, the US production share of total light vehicles was 67.9%, (up 0.7%), Canada’s was 14.0%, down (0.2%), and Mexico’s was 18.1%, (down 0.5%).

Ward’s Automotive reported this week that total light vehicle inventories in the US decreased by 4 days of sales in March to 65 days which was 7 days more than March last year. Month over month FCA (Fiat Chrysler Automotive) was down by 7 days to 82, Ford was down by 4 to 80 and GM up by 4 to 71 days.

Fig 7

Fig 8

Consumer Confidence: The 3MMA Present Situation Index recorded a score of 114.0 on this month’s US Conference Board Consumer Confidence Index, up 5% y/y. However the Expectation index declined 11% over the same timeframe resulting in the Composite Index falling 4% over the past 12 months, (Fig. 9). The pessimistic outlook stem from economic concerns on the part of purchasing decisions such as a house or vacation. Gasoline prices are on the rise which impacts consumer’s wallets. On a positive note, jobs are plentiful and the stock market has staged a respectable recovery over the past couple of months, improving the overall “wealth effect”.

Fig 9

US Steel Long Product Preliminary Imports (SIMA) : Preliminary count of steel long product imports, as defined by the Department of Commerce under the Steel Import Monitoring and Analysis system, totaled 567,000 tons (kt) for March, a 12% month over month increase. Year to date US long product imports plus March preliminary count totaled, down 10% compared to imports through the first quarter of 2015, (Table 6).

Rebar imports lead this increase, up 36% m/m. Turkey shipped 90% of the rebar imported to the United States, while taking advantage of the 10 day import licenses rule. Shippers have up to 10 days after the end of a month, to apply for import licenses. A total of179kt of rebar licenses were requested for March import, yet preliminary import count totals 245kt thus far. Turkey accounted for 55kt of these late applications, and for the month over month increase. Year to date rebar imports, plus March preliminary, totaled 563kt a 2% y/y decline.

Preliminary wire rod imports were flat compared to February. Russia began shipping wire rod to the US in December 2015 and has increased shipments each month since. Russian and the Ukraine together captured 20% of March’s wire rod import market. Canada accounted for 29%, while Japan contributed 16.6% of the imported wire rod. YTD through March 400kt of wire rod was imported to the US up 1% y/y.

Light angle and channel preliminary imports rose 20% m/m, with 95% imported from within NAFTA. Year to date imports fell 14% y/y. In contrast heavy structural steel imports rose 9% m/m reinforced by a 66% increase in beam imports. Additional March beam imports shored from South Korea, Spain, Luxembourg, Russia and the United Arab Emirates. The heavy angle and channel component fell 39% m/m as only 21kt have been counted so far.

Cold finished bars (CFB) and hot rolled bars (HRB) imports include merchant bar quality (MBQ) and special bar quality (SBQ) products. CFB imports were flat m/m with 99% of requested licenses having been accounted for. HRB fell 12.7% m/m. Based on past six months of final imports, Gerdau has extrapolated that approximately 20.7% of March HRB imports were MBQ with the remaining products falling under SBQ, (Fig. 10). Month over month MBQ imports may fall 26% as SBQ imports fall 6% m/m. However, preliminary HRB imports fell with 12kt of requested licenses not yet accounted for. Import license regulations allow shippers 75 days after application to utilize the license for import, leaving 12kt of unfulfilled licenses that could be imported during April or May. Month to date, April HRB licenses total 106kt. Combined with the possible unused March licenses, April has a potential 25% m/m increase for Merchant and Special bar quality imports.

Table 6

Fig 10