Steel Mills

HARDI/ITR Quarterly Forecast July 2016, Part 1

July 26, 2016

Steel Market Update is a member of an association connected to the construction industry called HARDI. HARDI stands for Heating, Air-conditioning & Refrigeration Distributors International. HARDI and The Institute for Trend Research (ITR), an economic forecasting company, work together to gather economic data to provide a forecast to the HARDI members located in the United States and Canada. The information shared in our newsletter is only part of a much larger package seen by participating HARDI member companies.

ITR looks at data using a 3 month and 12 month moving average to determine where business is within the growth cycle. Today’s issue will cover the general economic overview as well as forecasts for the Northeast, Mid-Atlantic, and Southeastern Region based on data from May and June 2016.

Economic Overview

ITR economics is predicting transient weakness for the economy based on a number of economic indicators:

• Existing and new home sales did well in May
• May housing starts were strong after a weak April
• The Federal Reserve “turned the money supply spigot back on”
• The June Purchasing Managers Index is in a rising trend
• The NY Fed indicates that 2Q16 GDP is tracking to come in stronger than Q1 2016
• The GDP for Q1 2016 was revised upward

ITR writes that while 2016 is not a “great” year it is better than 2015 for HARDI members and 2017 will be even stronger.

Northeast Region

Residential construction in the Northeast is expected to drop significantly in the second half of 2016 as permit authorizations decline. Home price growth is also generally weak in the region. A surge in authorizations in New York occurred in 2015 due to tax credits but fell by more than half in first quarter 2016. Permit authorizations for 2016 are expected to be 48.4 percent below the 2015 total. Levels are anticipated to improve in 2017, with a 22.1 percent increase, followed by slowing in 2018 for a yearly increase of 1.9 percent.

Nonresidential construction spending is expected to recover throughout the second half of 2016 and rise further in 2017. The peak will be late in the year followed by a gradual decline throughout 2018. Education and Government construction drove growth in the region in the first part of 2016. Rhode Island was leading the region with year-over-year positive growth of 14.9 percent in May with all other states in double digit deceleration. Overall nonresidential spending in the region is expected to decline 12.1 percent in 2016 compared to 2015. Growth of 9.9 percent is predicted for 2017 with a decline of 5.4 percent in 2018.

Mid-Atlantic Region

Momentum for residential permit authorization has been declining in the region except for Maryland and Delaware which have seen expansion in the three months through May. Home prices inflation weakened in the region in the first quarter and may hurt remodeling opportunities for HARDI members. ITR suggests permit authorizations for 2016 will be 20.7 percent below 2015 levels, rise 11.6 percent in 2017, and begin a gradual decline again in 2018 to -0.8 percent.

Nonresidential construction spending in the 12 months through May was $16.7 billion, an 11.1 percent decrease year-over-year. However, momentum is increasing, said ITR, and will likely continue throughout this year and into late 2018 before weakening. Government construction was 40.3 percent higher in the 12 month period through May and in the three months through May surged 216.8 percent year-over-year. Medical building and commercial building construction were up more than 200 percent in the three months through May. ITR advises that construction in New York City is in a gradual decline and work there will be leaner throughout the year. ITR forecasts nonresidential construction spending will be 25.4 percent higher in 2016 previous year spending, followed by increases of 14.8 percent in 2017, and 3.7 percent in 2018.

Southeastern Region

Residential permits grew 13.8 percent in the 12 months through May but slowed to 7.0 percent in the three months through May. The Southeast will benefit from senior housing due to a migration of aging adults from the Northeast and Great Lake Regions to the warmer and lower cost states of the South. North Carolina permits contracted 0.4 percent in the 12 months through May in contrast to strong growth in the rest of the region. Home prices are recovering from the sharp fall during the Great Recession and as home values improve, there will be more opportunities for new construction and remodeling. The forecast for permit authorizations is positive through 2018: an 11.8 percent increase in 2016, 8.8 percent in 2017, and 0.8 percent in 2018.

Nonresidential construction is expected to accelerate for the remainder of the year with new activity in commercial, education, government, and medical construction posting double digit percent increases in the three months through May. New projects will mean opportunities for HVAC distributors later in the year. Nonresidential spending is expected to increase 29.5 percent in 2016 from the previous year, slowing in 2017 for a decline of 1.4 percent, and rebounding in 2018 for an annual increase of 7.2 percent.

Note: The forecast regions are comprised of the following:

• Northeast: Maine, Vermont, New York (excluding NYC), New Hampshire, Massachusetts, Rhode Island, Connecticut
• Mid-Atlantic: Delaware, DC, Maryland, New York City, New Jersey, Pennsylvania (east)
• Southeast: Alabama, Florida, Georgia, Mississippi, North Carolina, South Carolina, Tennessee, Virginia

Dr. Alan Beaulieu, Chief Economist for HARDI and one of the partners at the Institute for Trend Research will speak at the Steel Market Update 6th Steel Summit Conference in Atlanta at the end of August 2016. For details about our conference please check our website: www.SteelMarketUpdate.com or feel free to contact our offices: 800-432-3475.