Steel Market Update

Global business confidence; the global economy has slowed since the spring when growth was above potential and accelerating. Confidence remains weakest in the U.S. and Japan, while South American businesses remain the most upbeat, reflecting stronger commodity prices and exports and sturdy capital inflows. European business confidence remains surprising resilient though volatile,   (Fig 1). The best news in the confidence survey is that businesses remain very willing to invest in equipment and software. The massive inventory drawdown that was weighing heavily on growth has ended. Hiring is weaker, but it is much improved since the beginning of the year. Sales have also held up fairly well.

Components of US GDP. Real GDP increased 1.6% at an annualized rate in the second quarter. This was revised down from 2.4% growth in the advance estimate of July but was better than the consensus forecast. Imports count negative and exports positive, the net of those two contributed negative 3.4% to the second estimate, (Fig 2). The other five components were positive. Surprisingly fixed asset investment grew in Q2. The effect of inventory rebuild has run its course for the present. The recovery continues but remains tenuous. Economy.com forecast is; Growth in the second quarter was too slow to make a significant dent in the unemployment rate. Growth is likely to remain soft through the rest of 2010, preventing any significant improvement in the labor market. The recovery should strengthen in 2011, finally leading to strong job growth and a lower unemployment rate.

Manufacturing index; the Institute for Supply Management's manufacturing index rose from 55.5 to 56.3 for August, (Fig 3). The modest gain suggests that manufacturing conditions held up better than expected. The increasingly negative trade balance probably reflects a slowdown in the global economy and the effect of Europe’s credit problems on U.S. trade. The difference between new orders and inventories—a proxy for future production—narrowed in August to 1.7 from July’s 3.3, this points toward additional, but more modest, gains in factory output. Manufacturing appears to have enough momentum to support the recovery this quarter but the rise in production in August is at odds with the weakening in new orders over the past few months. Manufacturers and their customers are building inventories, which foreshadows further declines in new orders.

Consumer confidence as reported by the Conference Board rose in August on the basis of a jump in the expectations component. The consumer’s view of the current situation continued to deteriorate, (Fig 4). On a 3 month moving average basis both expectations and the current view declined. There has never been a situation like this since 1980 where consumer’s view of the current situation stubbornly refused to come off bottom.

Total Construction spending in the three months through July were down by 14.4% from the same period last year, (Fig 5). Total private and public expenditures in the last three months fell by 16.0% and 11.9% year on year. Unfortunately, there remain several obstacles for a rebound in construction spending. One of the largest threats over the next year is an end to ARRA funding; the monies are expected to dry up in the first half of 2011. State government budgets are not yet strong enough to compensate for this loss, and it is expected that public construction spending will decline next year. Private construction spending will not improve until asset values and vacancy rates recover.