February 2020 Volume 2

ECONOMIC UPDATE

The six that are moving in a positive direction include some important indicators for the future but there are some negative trends that might affect the rest of the year as well. The positives include new automobile/light truck sales, new home starts, industrial capacity utilization, metal pricing, appliance activity, credit movement as measured by the Credit Managers’ Index and the Transportation Activity Index. The latter two readings have a history of being “canaries in the coal mine” as they react quickly to changes in economic momentum and tend to point the way for the rest of the economy later. The six that have trended in a more negative direction include steel consumption, the new orders index from the Purchasing Managers’ Index, industrial capacity utilization, capital expenditures, durable goods and factory goods. There are some important themes here to pay attention to. The common factor as far as growth is anticipation of a decent short term trend and the existence of confidence within the ranks of the consumer. The common theme as far as the negative numbers is that these are looking out further into the future. The consumer is still in a good mood and has yet to start worrying about the possibility of layoffs or the arrival of inflation. That translates into wishing to buy cars and homes and these indicators are therefore trending up a little. Metal pricing has reacted to the decision on the part of producers to reduce their output a little and allow prices to rise. Gold is way up in reaction to the turmoil in Iran and the Middle East but oil prices have barely budged and that was an unexpected development. Appliance activity has been reacting to the confidence in the consumer and their interest in buying homes or engaging in home improvement activity. The Credit Manager’s Index has been improving for an interesting reason. The bulk of the good news is coming from the “unfavorable” factors. This means that there have been improvements in terms of disputes and slow pays and even accounts placed for collection. It would appear that many companies are trying to enter 2020 with a better credit situation and are trying to catch up with those they have been buying machinery and inventory from. The negative activity is almost entirely focused on production decisions. There has been a decline in steel consumption as there has been very little improvement in the infrastructure development promised over the last few years. The numbers are down when it come to the new orders index from the Purchasing Managers’ Index and this is the more forward looking of the sub-indices. The overall PMI has been in contraction territory for the last five months in a row and so has the new orders index. The capacity numbers have retreated a little and there has been far less in the way of capital investment as one would expect when there is already slack in the system. The durable goods numbers and the factory numbers are both following suit. The sense is that while the current numbers are good there is limited confidence in the ability of the economy to sustain this level of activity. Election years always create uncertainty and this one will be far more threatening than past versions. Trump is capable of drastic moves designed to appeal to his core supporters and the Democrats have a far more “progressive” agenda which is generally hostile to the business community.

New Automobile/Light Truck Sales - The automotive sector is a key part of the manufacturing community worldwide and there have been any number of controversies involving the sector and global trade. The key part of the new USMCA was the requirement that there be more domestic content in cars produced for the US market (more of the assembly and more parts from the three nations in the pact). There has been a threat to cut off the European car market from US access and this would come as a major blow to a German economy already in recession. The numbers in the US have been flat for the last year but that hides some important shifts. The demand for small cars has all but evaporated as the majority of the vehicle buyers are attracted to SUVs, CUVs and trucks. There is also an ongoing concern over the driving habits of the millennial and Gen-Z. Those that live in urban areas are not all that interested and that leaves Boomers as the largest car buying market. The rise of the electric vehicle has been slowed by cheap gas and there is little on the horizon pointing to higher fuel prices. If an imminent war in Iran is not enough to cause a major jump in the per barrel price of oil it is hard to determine what would (maybe if North Dakota decided to join OPEC?). CCAI/IHEA Indices Continued New Home Starts - The housing market is divided in a number of ways and that always makes definitive statements challenging.There are the very obvious regional differences as there will always be parts of the country with a hot market and parts that are less than robust – often within the boundaries of a single state or community. The new home market is a relatively small part of the total as sales of existing homes dominate activity. There are multi-family units and senior living complexes and so on. The data collected on new home starts will show this sector to be most sensitive to factors such as mortgage rates and overall levels of consumer confidence. This data also tends to fall into two categories- higher priced homes and starter homes. The starter category has been the most sensitive to factors such as mortgage rates, the price of the home and consumer confidence while the higher end homes are most sensitive to the performance of the stock market. The big jump in the last month of readings is due primarily to activity in the higher end homes. The millennial buyer is still leaning more towards the multi-family unit although those in their 30s are becoming more interested in single family dwellings as they start families. Steel Consumption - The levels of steel consumption in the US and globally depend on a handful of markets. At the top of the list is construction and within that sector the most important area is public sector followed by commercial activity. The pace of growth in housing has almost nothing to dowith steel demand.The next largest category is automotive and vehicle assembly in general. After that it is a crowded field that includes everything from agribusiness to ship building and health care. The grades of steel matter tremendously as automotive doesn’t use the kind of steel that hospitals and restaurants use. The greatest challenge to the steel consumption numbers has been the slow pace of infrastructure development. Much attention is lavished on the issue of infrastructure but there

FIA MAGAZINE | FEBRUARY 2020 38