Weekly Market Update - July 30, 2015

Growth of GDP 1st Estimate of Q2 2015: The Bureau of Economic Analysis, (BEA) released the first estimate of Q2 2015 Annual Revision of the National Income and Product Accounts on Thursday. The BEA has been criticized for the way they do seasonal analysis which has tended to penalize the first quarter. In the latest release revisions were made retrospectively for three years and Q1 2015 was revised up from negative 0.2% to positive 0.6%.

The annualized growth rate in the 1st estimate of the 2nd quarter was 2.3%. GDP is measured and reported in chained 2009 dollars and in Q2 was estimated to be $16.270 trillion. On a year over year basis GDP was 2.32% higher in the 2nd quarter than it was in Q2 2014 which is in line with performance since Mid-2010.

Fig. 1 shows the headline quarterly results since 1990 and the latest IMF forecast through 2020. There are six major subcomponents of the GDP calculation and the magnitude of these is shown in Fig. 2. Personal consumption is dominant and in Q2 accounted for 68.60% of the total. In the latest data there has been a dramatic change in net exports for which we have seen no explanation in our other investigations. In Q1 net exports contributed negative 1.92% and in Q2 contributed positive 0.13%. The contribution of personal consumption increased from 1.19% in Q1 to 1.99% in Q2. Personal consumption includes goods and services, the goods portion of which includes both durable and non-durables. Government expenditures contributed negative 0.1% to growth in Q1 and positive 0.14% in Q2. The contribution of fixed residential investment declined from 0.32% to 0.21% and the contribution of fixed nonresidential investment declined from 0.2% to negative 0.07%. Inventories which had contributed negative 0.87 in Q1 contributed negative 0.08% in Q2. Increasing inventories make a positive contribution to GDP and over the long run inventory changes are a wash and simply move growth from one period to another. Fig. 3 shows the breakdown of the $16 trillion economy.

Fig 1

Fig 2

Consumer Confidence: The Consumer Confidence Index fell precipitously in July to 90.80 from 99.80, the largest month over month drop in four years. It is also the lowest reading since September of last year, (Fig. 4). Quite surprisingly, the first quarter of 2015 yielded two 100+ readings despite a contracted economy and harsh winter. July’s reading is only up 0.6% on a y/y basis, however, the 3MMA is up 10.2% during the same time period and above 90 for the 12th consecutive month.

The Present Situation sub-index also fell in July with a reading of 107.4 versus 110.3 in June. This figure is up more than 22% on a y/y basis while the 3MMA is up nearly 28%. Both indexes have remained above 100 for seven months in a row. The Expectations sub-index fell to its lowest reading since February 2014 of 79.9 from 92.8 in June. It is below 80 for the first time in 17 months. The sub-index is down 13.1% on a y/y basis, definitely not the outlook that posits an improving economic situation.

Labor market conditions also deteriorated with those expecting plentiful employment decreasing to its lowest level since April. On a similar note, those consumers expecting a pay raise also declined to its lowest level since February of this year. These anecdotal data points suggest an expectation of a weaker labor market in the coming months. Recent data regarding home buying plans also rose in July, perhaps on the tide of a potential rise in the Fed Funds rate. Likewise, inflation expectations remained subdued as the FOMC noted there needs to be improvements in labor market slack before a liftoff of the Fed Funds rate.

Fig 4

Nonresidential Construction Update: Based on information from Dodge Data and Analytics, the 3MMA of nonresidential starts in June was exactly the same as June last year resulting in the zero growth result shown in Table 1. On a trailing 12 months basis, growth year over year through June was 5.8%. This table includes apartments > 4 stories which we include in non-residential on the basis that these structures are an opportunity for steel or reinforced concrete framing. At this time apartments are by far the largest sector in our definition of non-residential and in June on a 3MMA basis had a y/y growth rate of 35%. At the end of 2014 we had been projecting that non-residential construction including apartments would have recovered to the pre-recession high by mid-2019 and excluding apartments by late 2021. These assumptions have become increasingly questionable during the course of 2015 as shown in Fig. 5. Excluding apartments the rolling 12 month square footage has declined for four straight months and momentum has been negative for seven straight months. It’s too soon to conclude that nonresidential construction is in trouble but the situation bears close scrutiny during the 2nd half of 2015. Looking at individual project types on a rolling 12 month basis, warehouses, educational, offices and banks, manufacturing plants, lodging, transportation and recreational all have positive growth. The bad news is that on a rolling 3 months basis y/y the project list with positive growth shrinks to parking garages, lodging and recreational. Please note these comments are based on starts data in which the total project is added to the data base as soon as ground is broken. The Commerce Department provides “Construction Put in Place” (CPIP) data in which data is continuously added as a project proceeds. It is worth noting here that the CPIP data does not agree with the Dodge starts and has a positive 19.4% growth rate in the latest 3 months y/y with positive momentum. Obviously starts should lead the CPIP but the discrepancy is rather extreme.

Table 1

Industrial Construction Starts: US industrial construction starts were down 3.2%, 3 months y/y ending July and off a sharper 15.3%, 12 months y/y. On the positive side: power, terminals (oil & gas), production (oil & gas), food and beverage, and pharmaceutical & biotech all recoded double digit advances 3 months y/y. Project groups posting double digit declines over the same timeframe include: transmission (oil & gas), alternative fuels, petroleum refining, chemical processing, metal & minerals and industrial manufacturing, (Table 2). While it appears from Table 2 that starts are slowing down we need to need to take in account that historically, expenditures on industrial construction starts are quite volatile. Fig. 6 illustrates this volatility on a 3 month y/y basis, presenting expenditures going back to 1994. Fig. 7 shows the same data on a 12 month y/y basis which smooths the picture out quite a bit. Expenditures remain very high compared to the 1994 through 2006 time period.

Fig. 8 presents the 3 month total and 3 month y/y change in spending by region. Despite the drop in oil prices, the Southwest continues to command the lion’s share of the spending with 29.32 Bn of the 66.57 Bn, accounting for 44% of the national starts over the past three months.

Fig. 9 examines Canadian industrial construction expenditures over the past four years. The blue bar is total expenditures and the red line represents the Western Provinces (Manitoba, Saskatchewan, Alberta and British Columbia). As you can see the Western provinces account for a huge ratio of the total industrial construction spending. From 2012 to present the ratio was over 71% and the vast majority of this construction was in the Province of Alberta where the Oil Sand projects had been booming. The price of oil crashed last summer, and so did the projects. According to the Toronto Star, over 100,000 oil related jobs have been lost YTD in Alberta as a result of the decline in oil pricing.

Table 2

Fig 6

Regional Job Creation Q2 2015: Table 3 shows the history of quarterly job creation by region for the last 4 ½ years. All regions had positive job creation in Q2 led by the Pacific with 113,600 new positions and the North Central in last place with 3,100. The North Central region consists of IA, KS, MN, MO, NE, ND and SD. This region was dragged down by Nebraska and North Dakota which lost 7,700 and 4,700 jobs respectively. States with the best performance in Q2 were New York with 49,700, Florida with 49,800, Texas with 49,700 and California with 86,400. From an energy point of view, Texas has bounced back due to its diversified economy but North Dakota has not.

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 3,911,000 more people employed than there were immediately before the recession but of that number a third were created in the South Central, (TX, LA, AR and OK). The East South Central, (AL, KY, MS, and TN) is the only region not to have surpassed the pre-recession number of people employed but are almost at that point, (Table 4). Employment is now 12,341,000 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 2,490,000 new positions which amounts to 13.4% of total employment. The South Central is in 2nd place with 1,904,000 jobs created which is 12.9% of total employment. The East North Central (IL, IN, MI, OH and WI) currently has the highest number of employed people with 21,522,000, followed by the Pacific with 21,013,800, (Table 5).

Table 3

Table 4

Currencies: The U.S. Dollar index came in at 117.57, more than two years with a value above 100. Despite a Q1 contraction of 0.2, the Index has steadily climbed to levels seen during the beginning economic expansion of the 2000s. It has strengthened 14.9% on a y/y basis and 2% over the last month against the Daily Broad Index, (Table 6).

A strong economy, relative to the rest of the world, has helped the Dollar strengthen to near six year highs. The Dollar strengthening makes scrap from the U.S. less attractive to buy on the global market and steel less attractive to buy from the U.S. Other major economies that rely on strong oil prices have also helped create an appreciative environment for the Dollar.

The Euro has seemingly gained against the Dollar since the “Grexit” scenario has abated. Greece’s Prime Minster, Alexis Tsipras, gave into Germany’s demands and will not be able to restructure its debt under the current agreement. It has become a major failure for the Prime Minster as he ran his campaign on debt restructuring or even debt elimination, (in the finance world known as a “haircut”). The IMF came out after the agreement and said that Greece would be back in the same situation without getting some type of debt relief. Despite all the progress Greece had made on having primary surpluses, at the expense of the citizens, its debt-to-GDP ratio has climbed dramatically. Without necessary debt reform, with the backing by the troika, Greece will no doubt remain in the depression state for years to come.

Table 6

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