SMU Analysis: Key Market Indicators through February

Please refer to Table 1 for our view of the present situation and the quantitative measure of trends. Readers should regard the color codes in the present situation column as a visual summary of the current market condition. The “Trend” columns of Table 1 is also color coded to give a quick visual appreciation of the direction the market is headed. All results are the latest available as of Feb. 26, 2020.

Present Situation

Our view of the February data is that the net number of indicators we regard as weak decreased by four from January, resulting in the least number of negatives in the history of this report. The transition in February was from weak to normal. By normal we mean the current data value is in the mid-range of the historical distribution. This improvement in February’s present situation was presaged by the strong trend reports of December and January. Figure 1 shows the history of our view of the present situation data since January 2010 on a percentage basis, and on the far left of the chart is the August 2008 situation immediately before the recession struck the steel business that September. Our point here is that the writing was on the wall at that time (see below), but few saw the abyss we were about to fall into. There were five individual changes in February. Positive changes from negative to normal occurred in the Chicago Fed National Activity Index, in demand for commercial and industrial loans, in the ISM manufacturing index and in manufacturing capacity utilization. The only downside (and it’s a big one) was that mill shipments of sheet and strip products deteriorated from positive to normal.  

We make special mention of the Treasury yield spread here because the 10-year minus two-year dipped into negative territory for three days at the end of August. Historically, a negative yield spread has been a predictor of recession within 18 months. On Feb. 25, the value was positive 0.13, which was a deterioration from 0.20 percent at the end of January (Figure 2). The negative duration in August was so short and the negativity so small that maybe we have dodged the recession prediction for now. The last time the 10/2 spread was negative was June 6, 2007.

There were no other changes in our view of the present situation in February.

Trends

Most values in the trends columns are three-month moving averages (3MMAs) to smooth out what can be very erratic monthly data. Trend changes in the individual sectors are described below (please note that in many cases this is not February data but data that was released in February for previous months). In August 2008, 70 percent of the indicators were trending negative, but the present situation at that time was balmy giving executives a false sense of security.

There was a substantial improvement in market trends in December that continued in January and held up in February. In December and January there was a net increase of nine positives. In February there was a decrease of two positives and one, the price of rebar, was unchanged. Figure 3 shows the trend of the trends and the pre-recession situation at the far left of the chart. Nine indicators reversed direction in the February data and one was unchanged. Trends that reversed from positive to negative were the Broad Index value of the U.S. dollar, the price of shredded scrap, the price of zinc, shipments of long products and the price of hot rolled coil ex works Indiana (this sounds depressing but we believe we have to see the big picture). Indicators that reversed from negative to positive were bank lending standards and demand for commercial and industrial loans, expenditures for non-residential construction and the ISM manufacturing index. This was the best manufacturing report since last October, and construction continues to be very strong.

As a reality check for this report we include here Figure 4, which is SMU’s Steel Buyers Sentiment Index. Readings are developed during the twice monthly SMU market surveys. SMU Steel Buyers Sentiment is a measure of the current attitude of North American buyers and sellers of flat rolled products regarding their company’s opportunity for success in today’s market. A reading above the neutral point of zero indicates that a preponderance of buyers have a positive attitude. The index has been deteriorating since mid-February last year, but in mid-December there was a turnaround that continued through mid-February. This change is encouraging and confirms the general observations about our 36 market indicators. On a 3MMA basis the mid-February sentiment index value was 56.17, up from 36.83 in early December but down from a peak of 73.8 in February 2018.

We believe a continued examination of both the present situation and direction is a valuable tool for corporate business planning. Figures 1 and 3 both show the pre-recession situation in August 2008. The trends analysis shows that the steel market was going over a cliff at that time, but the present values were still good with only 23 percent registering as historically negative.

Explanation: The point of this analysis is to give both a quick visual appreciation of the market situation and a detailed description for those who want to dig deeper. It describes where we are now and the direction the market is headed and is designed to describe the situation on a specific date. The chart is stacked vertically to separate the primary indicators of the general economy, of raw material prices, of both sheet and long product market indicators, and of construction and manufacturing indicators. The indicators are classified as leading, coincident or lagging as shown in the third column.

Columns in the chart are designed to differentiate between where the market is today and the direction it is pointing. Our evaluation of the present situation is subjectively based on our opinion of the historical value of each indicator. There is nothing subjective about the trends section, which provides the latest facts available on the date of publication. It is quite possible for the present situation to be predominantly red and trends to be predominantly green or vice versa depending on the overall situation and direction of the market. The present situation is subdivided into: below the historical norm (-), (OK), and above the historical norm (+). The “Values” section of the chart is a quantitative definition of the market’s direction. In most cases, values are three-month moving averages to eliminate noise. In cases where seasonality is an issue, the evaluation of market direction is made on a year-over-year comparison to eliminate this effect. Where seasonality is not an issue, concurrent periods are compared. The date of the latest data is identified in the third values column. Values will always be current as of the date of publication. Finally, the far-right column quantifies the trend as a percentage or numerical change with color code classification to indicate positive or negative direction.