Interpreting Demand Signals

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Without a doubt, companies we have spoken with in the last two weeks feel some optimism in the air. Order books have picked up, the number of programs/projects/parts companies have quoted on has increased and even in our world of sourcing consulting, we’ve witnessed much more activity during these past few weeks. And despite the unemployment numbers just released, many economic indicators have moved into favorable territory. And yet as metals market watchers, we remain very cautious about the economic outlook based on a more in depth examination of those all-so-important demand signals. Last week’s headline story came from the latest ISM (Institute of Supply Management’s) monthly manufacturing report on business.

And though most press accounts focus on the unemployment numbers, we remain concerned about several elements within the ISM report. To begin, we look at the all important PMI showing a current two month trend of growth (the index exceeded the magic number of   50) but declined to 52.6 in September from 52.9 in August. A reading of above 50 indicates the economy is expanding. We look for three data points before we declare a trend and with a declining number, we could see economic activity hovering at or just above the growth mark. Two other elements should also raise concern. New orders fell from 64.9 to 60.8 in September while production saw a big drop from 61.9 to 55.7. Now the macro headlines remain positive (remember, all are above 50) but the deeper look suggests the trend line might be moving in the wrong direction.

In addition, prices fell from 65 to 63.5. Again, though price increases remain above that 50 percent mark, the trend moved in the wrong direction. Of course as a buying organization this might appear as welcome news but it also indicates how much of a demand exists for various products. From a metals perspective, fabricated metal products did report paying higher prices and remains consistent with the price increases announced by the steel mills this fall. However, we question the sustainability of those announced price increases. In fact, the latest steel price polls suggest the price increases for Oct 1 only notched up 1% and for some products, remained flat. This suggests steel prices may have peaked for the time being.

The only positive news on the ISM report based on our analysis involves the backlog of orders that moved from 52.5 to 53.5 suggesting backlogs have increased. We won’t declare this a trend however, until we see October’s data. Primary metals and fabricated metal products both reported increased order backlogs. And for the first time, imports have now moved above that 50 percent threshold from 49.5 to 52.

Perhaps the most interesting finding in the latest ISM report centered around several questions designed to better understand how particular industries will benefit (or has benefited) from the American Recovery and Reinvestment Act (e.g. the stimulus package). According to the report, 30% of all respondents indicated that their specific industry would benefit from the stimulus package including fabricated metal products and primary metals and 27% of respondents indicated that their specific company would benefit from the legislation.

How odd that the numbers would be reported in the inverse. Our headline would have said, “fully 70% of respondents do not feel their industry would benefit from the stimulus package and 73% felt their companies would not receive benefits.”

Proceed with caution.

–Lisa Reisman

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