Western region activity levels improve into summer with a cautious outlook

November 2011 - Western region activity levels have shown resilience during the summer in the face of an overall contraction in national manufacturing activity. A pickup in orders for commercial aircraft coupled with stable backlogs has helped push capacity-utilization rates near their highest levels in 2011. Contrarily, housing markets continue to struggle as activity levels trend near 15-year lows.

Aluminum demand in the United States has declined approximately 7 percent through July while auto assemblies and aircraft manufacturing activity have remained relatively robust. Boeing’s aircraft orders have increased 18.1 percent through August, driven by a 39.8 percent increase in narrow-body models, which have accounted for nearly 68 percent of its total order base in 2011. In addition, strong order rates coupled with stable backlog have kept capacity-utilization levels elevated throughout the year. Based on backlog and production rates, Boeing has almost five years of production visibility, boding well for long-term demand prospects in the aerospace sector.

Although manufacturing has improved marginally, unemployment trends continue to struggle. The western region unemployment rate averaged 8.9 percent (unadjusted for state size) in August, improving 0.43 percentage points from one year ago. This has helped housing markets moderately as total western region permits registered an 8.1 percent year-over-year increase in August, with multi-unit permits driving the majority of the rise. Permits continue to bounce along the bottom of their trailing 15-year range and would need a material improvement in employment and a reduction in inventories to help combat this trend.

Overall, industrial metal prices have continued to fall through September and are now 20 to 30 percent off 2011 highs. Decreasing business confidence in the Organization for Economic Cooperation and Development nations and tighter credit conditions in emerging markets have been the main drivers in restraining material improvements in demand. Moreover, plentiful inventories across the industrial metals spectrum, more specifically for aluminum, where financing deals have tied up more 75 percent of the metal in LME warehouses, may continue to subdue restocking-driven demand.

As prices continue to fall, metal buyers should be aware current prices of steel and aluminum are closer to their marginal cost of production, potentially providing some downside cushion relative to copper prices. While global economic activity has slowed, mine supply disruptions and falling ore grades for copper, in addition to greater supply discipline in steel and aluminum markets, could act as price-stabilizing mechanisms in the long run. 

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Data provided by Bloomberg

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