Economy Is Growing, But It's Like Watching Cement Dry

by: Michelle Galanter Applebaum
More Optimism, Less Strength
The May Institute of Supply Management (ISM) survey indicated that steel buyers are becoming more optimistic about their future in most aspects while their current business fundamentals are deteriorating. The good news in the survey remained inventories, which remain lean; 100% of respondents in May indicated inventory levels at less than three months for the first time since November 2009. Likewise some 21% of respondents expect to increase their inventories in the next six months, a dramatic pickup from zero in April and the highest reading since July 2006.
Better Employment Outlook, But Receipts/Shipments Deteriorates
There was meaningfully good news on the employment outlook with 50% of respondents indicating plans to hire, up from 40% in April and 7% in February for the highest level since December 2007. However, the bad news was that for the first time in nearly a year, not a single buyer reported that current receipts are ahead of current shipments – this is a key forward-looking metric that has been steadily deteriorating the last few months. Optimism in the outlook was quite evident, however, with some 36% of respondents – the highest level since August 2009 – expecting receipts in the next three months to be ahead of current levels.
Buyers Seeking More Foreign
While overall the numbers remain tepid, interest in foreign steel hit the highest level since last fall, with 15% of buyers saying they plan on increasing their reliance on foreign steel in the next six months, up from zero last month. An interesting dichotomy exists though because buyers are also reporting that foreign mills are less active seeking domestic business, with no buyers reporting “more” active in May, after 22% reported increased activity in April.
Outlook – Economy’s Growth Watching Cement Dry
This is an economy of fits and spurts and while the bright spot in the economy – automotive – continues at a surprising pace, the weakness from non-residential construction markets has only worsened. The export economy has held a potential bright spot but now with the recent deterioration of the euro, that bright spot may be fading fast. We expect to see domestic steel demand pickup the pace in a slow and steady recovery in coming months, with pricing spurred by higher cost raw materials despite weak demand.
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