Same Old Story; Many Indicators Improve With Little Effect On Non-Residential Construction

As we all know, our country is in the middle of a horrible recession and everyone is looking for any type of sign, data, graph, or chart to signify the end of this downward spiral.  Miles•McClellan is no different in the search for answers, and we have decided to share a few important economic indicators with all of you every month so we can all better understand the challenges we face in the near future.     
 

Headlines
• The Architectural Billing Index reaches its highest billing mark since August 2008 but is still hovering under a score of 50 which means a decline in architectural billings for the month.       

• Non-Residential Construction Index from FMI told a similar story as it increased to its highest amount in 2009 but is also still under the 50 mark showing a contraction in the market.    

• Housing Starts unexpectedly dropped 10.6% in October after many experts felt that starts would be even for the rest of 2009.  Some feel the fall will be short lived as others feel that the high vacancy rate in housing will keep housing starts down.

ABI Billings At Highest Point Since August 2008; But Still Under 50

Architectural Billing Index
September Billings:  43.1      October Billings: 46.1
September Inquiries:  59.1    October Inquiries: 58.5

“Amidst a continued high level of inquiries for possible new projects, the Architecture Billings Index (ABI) reached its highest mark since August 2008, just before the serious credit problems emerged in our economy. This score, however, still indicates a continued decline in demand for design services. The new projects inquiry score was 58.5, following the 59.1 mark in September.  “This news could prove to be an early signal towards a recovery for the design and construction industry,” said AIA Chief Economist Kermit Baker, PhD, Hon. AIA. “On the other hand, because we continue to get reports of architecture firms struggling in a competitive marketplace with a continued decline in commercial property values, it is far too early to think we are out of the woods.””


Calculated Risk
Graph: ArchitectMagazine.com - AIA Data

Initial Claims Decrease; Unemployment Rate 10.2%

Initial and Continuous Unemployment Claims
Sept. Initial Claims: 553,500    Oct Initial Claims: 523,750
Sept. Cont. Claims: 6.19 M      Oct Cont. Claims: 5.79 M

“The number of Americans filing first-time claims for unemployment insurance fell last week to their lowest level this year, the government said Thursday.  President Obama said the figures were a “hopeful sign” but cautioned that unemployment is one of the “great challenges” facing the U.S. economy.  “Given the magnitude of the economic turmoil that we’ve experienced, employers are reluctant to hire,” he said.  Initial jobless claims have been declining for several weeks, raising hopes that employers could begin adding jobs as the economy appears to be emerging from one of the deepest recessions on record.  However, many economists expect the national unemployment rate, which rose to 10.2% in October, to remain elevated even as the economy recovers.  “The numbers are still terrible in absolute terms, but at least they are clearly heading in the right direction,” said Ian Shepherdson, chief U.S. economist at High Frequency Economics.”

CNNMoney.com, Ben Rooney
Graph: Calculated Risk

FMI - It May Take 3 Years For Commercial Construction Comeback

Non-Residential Construction Index
3rd Qtr: 44.8        4th Qtr: 47.7

Regarding a three year outlook on the industry, FMI states that “panelists have been quite optimistic about their markets coming back strong three years from now, although that optimism has dimmed since the second quarter, when there was a thought that the American Recovery and Reinvestment Act (ARRA) would help get the economy back on its feet sooner rather than later.  For markets like commercial and lodging construction, panelists believe it will take all of three years to make a comeback.  One market that has remained relatively strong throughout the downturn is the somewhat miscellaneous mix of utility, infrastructure and sundry niche markets.  Some contractors serve these markets on a regular basis, and others are beginning to seek them out because it appears that associated projects either have secure funding or are so necessary to the community that they must be built, recession or no recession.”

FMI
Graph: FMI Non-Residential Construction Index Report

Is Utilization Increasing or Is Capacity Decreasing?

Capacity Utilization Rate
Sept. 2009 Rate: 70.5%    Oct 2009 Rate: 70.7%

“The good news is that overall capacity utilization edged up to 70.7% in October, marking the fourth straight month of improvement. The bad news is that it is simply an awful absolute level. The long-term average total capacity utilization is 80.9%. Even after four months of increases, we are still below the all-time record low prior to this downturn of 70.9% set in December of 1983 (data on capacity utilization goes back to 1967).  The other bad news is that the rate of improvement is slowing dramatically. Overall capacity utilization bottomed out in June at 68.3%. It then gained 0.7% in July and 1.0% in August.  The rate of improvement slowed to 0.5% in September and was just 0.2% in October. That is not a good trend.  Further, over the last year, as some factories have closed up shop for good, overall capacity has declined by 1.0%. Decreasing the denominator can make things go up just as much as increasing the numerator can, but the implications for the economy are not the same.”

Zachs Investment Research
Graph Data: Calculated Risk

Automakers Expect Slow, Steady Increase For Rest Of 2009

Auto Sales
September 2009: 9.22 M    October 2009: 10.46 M

“U.S. auto sales in October turned in a performance reminiscent of what can now be called the good old days before last year’s market collapse, about even with October 2008 but up 13 percent from September.  “I’m taking a glass-half-full approach here,” said Jessica Caldwell, head of U.S. industry analysis for Edmunds.com. “We’re right about where we were a year ago, which is the first time in a long time we’ve been able to say that.  “We’ve moved past the bottom [of the market] and are showing steady improvement.”Echoed Fred Diaz, lead executive for Chrysler’s sales organization: “The industry showed signs of improvement this month with increasing sales, which is a trend we expect to continue for the remainder of the year.  “Bob Carter, vice president of the Toyota division of Toyota Motor Sales USA, said that he perceives “modest but positive changes in market conditions” and “a good upswing in the second half that bodes well for the future.”

AutoObserver.com
Graph: Calculated Risk

Housing Starts Face Biggest Drop Since January

Housing Starts
September 2009: 590,000    October 2009: 529,000
 

“New construction on housing units dropped to a seasonally adjusted annual rate of 529,000, the lowest level since April. The 10.6% drop was the biggest percentage decline for starts since January.  “We believe housing starts’ strong decline to be only temporary, and should resume modest growth and stabilization over the next several months, as the tax credit extension should support market demand and perhaps offset some of the seasonal slowness in the winter months,” said Michael Rehaut, economist at JP Morgan Chase in a note to clients”(GR).  The Calculated Risk blog has an opposing view; “It is very unlikely that there will be a strong rebound in housing starts with a record number of vacant housing units.  The vacancy rate has continued to climb even after housing starts fell off a cliff. Initially this was because of a significant number of completions. Also some hidden inventory (like some 2nd homes) have become available for sale or for rent, and lately some households have probably doubled up because of tough economic times.”(CR)

Calculated Risk; Greg Robb, Makretwatch
Graph: Calculated Risk

TED Spread Stays Normal; A Potential Increase Coming?

TED Spread
September 2009: 0.16%    October 2009: 0.23%

At the end of 2008, the credit crisis led many to fear that banks of all size and shape may fail, and thus banks themselves weren’t willing to do business with each other. Credit, at the heart of the financial system, was frozen. Today, that story is vastly different as evidenced by the TED Spread.  Finally, in May of this year, banks began offering each other more reasonable terms and the spread dropped below 1%. Today, the TED spread stands at 0.2%; evidence of a normal inter-bank lending environment. As asset values have been highly responsive to the credit environment, we very well could experience further market strengthening under the conditions that the TED spread remains in tact, earnings continue to recover, and the economy grows. On the other hand, with a high proportion of “option ARM” mortgage rate resets on the horizon, many banks still over-leveraged, and unemployment heading to 10%, it would not surprise me to see an increase of the TED Spread and perhaps a pullback in the stock markets at some point in the next several months.  

Jack Brown, NaplesNews.com
Graph: Charts and Coffee Blog

Baltic Dry Index Rallies By More Than 25% Since September

Baltic Dry Index - BDI
August 2009: 2,318    September 2009: 3,043

“Increasing transport demand is also being shown in the rise of the Baltic Dry Index that tracks shipping rates for dry goods transported by sea and since it is not traded on an exchange is less subject to speculation and manipulation”(II).  “In September, Cosco Shipping researcher Kong Fanhua said the sector’s benchmark Baltic Dry Index (BDI) could rebound to 4,000 by the end of 2009. With a current value of 3,043, the Index is far from this goal, but it has rallied by more than 25% since the September 29 recommendation.  The BDI is now trading at levels unseen since August, and shipping stocks are surging higher. The sector remains mixed over the last month, but if the BDI rally continues there could be more upside to come”(YF).

InvestorsInsight.com; Yahoo Finance
Graph Data: Capital Link Shipping
Graph: TradeSystemGuru.com