Weekly Market Update - May 26, 2016

Dodge Non-residential Construction Starts fell slightly in April, down 1.6% y/y and off 1.5%, 3 months y/y. The largest two categories, apartments (> 4 stories) and warehousing continue to outperform rising 14.1% and 7.2% respectively on a 12 month y/y comparison. Apartment starts are slowing falling to +0.4% when looked at on a 3 month y/y basis, while the warehouse construction growth rate has moved up to 13.6% over the same time horizon. Many of the remaining project categories are showing declining rates of growth on both 12 and 3 month y/y metrics, these include: Office and banking (-19.0%, 3 months y/y), Retail (-18.1%), Medical (-24.6%), manufacturing plants (-24.2%), civic (-34.7%) and religious (-34.8%), (Table 1). Figure 1 examines starts data both with apartments (> 4 stories) and warehouses and without from 1990 to present. After the recession ended growth including apartments and warehousing rose at a more rapid clip than “all other” non-residential construction activity. Both lines (Figure 1) have reversed direction. The good news is that the lines are flattening out. An additional reason for optimism going forward is the non-residential growth forecasts compiled by the American Institute of Architects, (issued twice per year in January and July) which shows an average growth forecast for 2016 is 8.3% with a range of 4.5% to 9.4%.

Table 1

Industrial Construction Starts were down 21.3%, to $199.4 Bn compared to May 2015. On a 3 month y/y basis starts declined a smaller 16.4%, subsequently momentum was a positive 4.8%. Power projects declined 25.9%, 3 months y/y but were up 3.4% on a 12 month y/y metric. Production oil & gas starts plummeted by 95%, 3 months y/y and by 84.5% y/y due to the sharp decline in oil prices. On a positive note, industrial manufacturing and refining jumped triple digits in percentage terms 3 months y/y, (Figure 2 and Table 2). Of the 12 project categories 9 posted growth, with the same 9 recording positive momentum.

Figure 3 illustrates industrial starts by consensus region showing the y/y change in percent as well as the 12 month expenditure. Regions recording double digit declines include; The Southwest (-59.2%), New England (-48.9%), Mountain (-40.6%) and the Mid-Atlantic (-26.9%). Regions posting significant growth include; The Northeast (+128%), West Northcentral (+47.5%), Southeast (+36.9%) and the East Northcentral (+9.1%). The Westcoast realized a slight (-1.4%) decline y/y.

Canadian industrial starts were down 43.1%, 3 months y/y and off 32.3% compared to May 2015. Energy related projects were the principal reason for the large reduction with Production oil & gas down 52.5% y/y and petroleum refining down 93.4% y/y. Chemical processing, metals and mining and industrial manufacturing all posted large double digit declines, All regions of the country recorded negative growth y/y, with only Quebec showing positive growth on a 3 month y/y comparison, (Table 3).

Fig 3

Housing Starts and Builder Confidence Through April 2016: Total housing starts in April were at an annual rate of 1,172,000 which was up from 1,099,000 in March but down from 1,192,000 in April last year. The 3MMA in April was 1,161,000 which was up from 1,147,000 in March. The 3MMA has been range bound since last June between 1,131,000 and 1,167,000. February 2016 at 1,167,000 had the highest 3MMA since the recession. Total starts are still on track to reach 1.4 million units annualized by the end of 2018, (Figure 4).

Single family starts in April were at an annual rate of 778,000 with a 3MMA of 792,000. The 3MMA was up by 21.0% year over year but is still 57.3% below the peak of late 2005. Multifamily, (apartments / condominiums) starts in April were at an annual rate of 394,000 with a 3MMA of 369,000, up 2.0% y/y. (Figure 5). It now looks as though we may be seeing a shift away from multifamily housing based on the results for 2016. The trajectory of single family and apartments > 4 units are tracking to reach 900,000 and 500,000 by the end of 2018 respectively.

Figure 6 shows the regional situation for the 3MMA of total residential starts since February 2000. In the first half of 2015 the North East had the highest growth rate driven by apartment construction in New York State but that has cooled as preferential tax treatment has been eliminated. The South has had the strongest growth since the recession and has widened its lead over the West. The South currently has more starts than all other regions combined.

The S&P/Case-Shiller National Home Price Index shows prices of existing single family homes rising 5.3% annually in the last few months, well above the rate of inflation. The current level of months-supply at 4.7 is much lower than the housing boom-bust era of 2006-2012. Since 2010, home prices and sales have risen together while the months-supply has stayed in a range of 4 to 4.8 months. Mortgage rates, which have fallen from about 5% to 3.5% for 30-year fixed rate loans since 2010, are contributing to rising home prices. Improved consumer confidence and the decline in unemployment are also positive factors behind home prices. If the Fed pushes interest and mortgage rates up over the next year or two, and if the unemployment levels off as it approaches full employment, the rise in home prices is likely to be tempered.

The National Association of Home Builders, (NAHB) confidence report for May had a value of 58.0 with a 3MMA also of 58.0. Any value above 50 indicates an overall positive business confidence. The national average has been unchanged for the last four months but there are significant regional differences. Figure 7 shows both the National and regional indexes on a 3MMA basis. Confidence is strongest in the West and healthy in all regions except the North East.

Fig 4

Fig 5

Global Steel Production, April 2016: Production in the month of April on a 3MMA basis was 131,285,000 metric tons, up by 2.0% from March. Capacity is 2.3 billion tonnes per year and capacity utilization in April was 71.5%. There has been a significant decline in the 3MMA in the second half of the year since and including 2010 which then picks up in January and February, (Figure 8). In 2015 the uptick was delayed until April and the high point of 2014 was not reached. On average April has the highest monthly production of the year on a tons / day basis and historically has been up by 1.15% from March. This year April was up by 1.24% therefore was relatively normal. On a tons / day basis production in April was 4.496 million tonnes and the highest level since May last year. Since the recession, capacity utilization has been on a steadily downward trajectory with an upward blip in the last two months. Capacity utilization in the three months through April was 68.4%, down from 72.3% in three months through June last year.

Figure 9 is the most succinct description of the change in growth rate since January 2005. It shows the 3MMA of the monthly year over year growth of global steel production. This became negative in April 2015 for the first time since September 2009 and the slowdown accelerated through January this year when the contraction was 5.8%. Since January the contraction has slowed and year over year in April was 1.1%. In the last couple of years at the global level, steel supply has exceeded demand but it looks as though the much celebrated slowdown in production may be coming to an end.

Table 4 shows global production broken down into regions and also the production of the top ten nations in the single month of April and their share of the global total. It also shows the latest three months and twelve months production through April with year over year growth rates for each. Regions are shown in white font and individual nations in beige. The world as a whole still has negative growth of 1.1% in 3 months and negative 3.4% in 12 months through April. If the three month growth rate exceeds the twelve month we interpret this to be a sign of positive momentum and accelerating growth. Momentum was negative for over 12 months through February, became flat in March and positive in April.

China accounted for 51.5% of global production in April, up from 48.6% in February. Asia as a whole, including India, accounted for 69.4% in April. In March, China's assistant commerce minister stated that China had cut 90M metric tons of capacity and had plans to reduce it by another 100M-150M. There is no sign that this is having any effect. China’s March production was the highest since May 2014 and April was the 3rd highest in that 23 month period.

On a regional basis in 3 months through April year over year, South America and the EU declined by 13.3% and 6.0% respectively. China’s production was unchanged and Asia as a whole declined by 0.2%. Other Europe, (mainly Turkey) and the CIS had positive growth in the latest data. North America was up by 1.8% in total with the US up by 3.8%, Canada up by 7.3 and Mexico down by 8.2%.

Fig 8

Fig 9

US Steel Production, as reported by The American Iron and Steel Institute, for week ending May 21, 2016 totaled 1.756 million tons (mt), up 1.7% week over week to 75.1% capacity utilization, (Figure 10). Output YTD totaled 35.2 million metric tons (Mmt), down 2.4% y/y.

Steel production in the Great Lakes region recovered to 1.2% above production from one year ago. The Southern region, also gained strength this week, as production was flat y/y, (Figure 11). The Northeast and Western regions have been slower to recover, down 4.1%y/y and 7.1% y/y, respectively. Production in the Midwest was down 15% y/y. National weekly steel production has risen 10.2% since the year began, driving utilization of US steel capacity above 75% for the first time in 16 months, (Figure 12).

Fig 10

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