Midwest activity levels gain traction in the second quarter; downbeat outlook
September 2011 - Economic activity in the Midwest was mixed in the second quarter as the auto sector continued to struggle from supply chain disruptions and weak consumer confidence. However, the steel and machinery sectors registered increased activity levels compared to the first quarter of 2011. Despite higher second- quarter activity levels in aggregate across the regional economy, U.S. durable goods (new orders) growth continued to slow, registering a 7.9 percent year-over-year increase in June, down from May’s 9.4 percent year-over-year reading.
Unstable consumer confidence and supply chain disruptions stemming from the Japanese earthquake continued to plague production levels and stymie sales as a shortage of popular cars and lack of discounts failed to entice buyers. Auto sales started the year on strong footing, averaging 12.9 million vehicles SAAR (seasonally adjusted annual rate) in the first quarter, while sales faltered in the second quarter to an average rate of 12.1 million vehicles.
While the auto sector struggled to regain traction, the steel and machinery sectors registered better activity levels in the second quarter versus the first quarter. Inventory restocking coupled with higher shipment levels to the oil and gas, containers and machinery manufacturing sectors buoyed activity across the steel industry. Although the second quarter featured positive results, second half outlooks from company managers across the industry revealed a slowing of orders and a more tepid mindset from downstream buyers. Machinery manufacturers followed the same path because order rates have decelerated recently, with guidance mirroring the read-through seen in the steel industry.
Industrial metal prices have fallen anywhere from 15 percent to 25 percent from their first-quarter highs as underlying demand trends have weakened. Policy measures to cool inflation have taken their toll on confidence and investment throughout regions like China, India and Brazil, while sovereign debt worries in Europe and political instability in Washington have hurt confidence in the United State’s ability to rectify debt and budget woes.
Looking ahead, plentiful global inventories across the industrial metals spectrum could remain a drag on prices as seasonally weak demand trends complement the inventory glut. Although global economic activity has slowed since early 2011, metal buyers should be cognizant of mine supply disruptions in copper in particular, in addition to tighter supply discipline in steel and aluminum markets, all of which could help stabilize pricing in the long run.
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