Midwest activity struggled through second quarter; third quarter may be more of the same
September 2012 - In aggregate, economic activity in the Midwest was relatively weak in the second quarter despite more resilient production and sales trends from the auto sector. The Chicago PMI surveys, bellwethers of activity in the region, weakened throughout the quarter as both business and consumer confidence measures peaked, signaling that both the private and public sectors remain wary about the economic outlook.
Despite the cautious undertones from top-level surveys, data from the auto sector continued to exhibit strength from a production/assembly perspective. U.S. auto and light truck assemblies averaged a 10.55 million unit seasonally adjusted annual rate in the second quarter versus the 10.13 million unit SAAR seen in the first quarter, a nearly 4 percent increase quarter-on-quarter. Auto assemblies (ex-light trucks) were up nearly 11 percent quarter-on-quarter (4.27 million unit SAAR in the second quarter versus 3.86 million unit SAAR in the first quarter). Although production trends painted a relatively positive picture, auto sales moved more in line with higher-level PMI surveys. U.S. auto sales averaged a 14.05 million unit SAAR in the second quarter compared against a 14.49 million unit SAAR in the first quarter, a nearly 3 percent drop quarter-on-quarter.
Although the auto industry displayed a slowly improving landscape, those trends were not mirrored across the entire region. The Chicago PMI dropped from a first-quarter high of 64 to 52.9 in June, a sign that output growth is stalling. In addition, the new orders-inventory spread, a more forward-looking indicator of future demand, turned negative in June for the first time since May 2011, while the three-month moving average abruptly fell from a high of 15.6 in February to 1.8 in June. The decline was driven by a dramatic fall in new orders as inventories have increased marginally from the beginning of the year.
From a sector perspective, weakness in the Chicago surveys was driven in part by lower steel utilization and production rates. Output peaked in late April, as a drop in steel prices started to weigh on profitability. Service center restocking demand was muted as inventories remained elevated and buyers opted to purchase tonnages on a more hand-to-mouth basis.
Looking ahead, the outlook for prices remains mixed across the industrial metals spectrum. Unless producers can continue to rationalize capacity and balance the supply side of the market, upside momentum in steel prices is likely to be muted until raw materials prices (iron ore, coking coal, scrap) recover. Similar to steel, base metals prices also have been under pressure this year. Attention should be paid to China as the third quarter progresses to see if easing monetary policy can lift new loans and fixed asset investment and drive a more sustainable, albeit cyclical, recovery in metals demand.
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