Western region activity reflects national weakness with uncertainty for the next fiscal year

November 2012 - Western region activity levels were mixed throughout summer as trends in the region’s manufacturing sector mirrored the cyclical weakness felt nationally. 

Activity levels were boosted by oil production from Montana’s Bakken Shale, which helped combat slack coal output from states such as Wyoming. Despite the seesaw in activity, employment rates generally improved on a year-over-year basis, a phenomenon that helped push housing permits up nearly 36 percent year over year. However, aircraft orders have slowed since last year, and inventories have built throughout the manufacturing supply chain. In August, the U.S. PMI new orders-to-inventories ratio registered its lowest figure since January 2009. 

Strength from the auto sector continues to reverberate into the manufacturing sector. Data through August indicates motor vehicle assemblies and total auto sales are on pace for their best quarterly average since mid-2007. Aging vehicles and higher credit availability have been some of the primary drivers of the increase in sales, which have climbed to a four-year high.

Although downstream demand has been relatively robust from the auto sector, a consumer of 24 percent and 40 percent of U.S. steel and aluminum, respectively, prices remain weak. Overproduction and a flood of imports (namely for steel) have helped contribute to the weakness witnessed during 2012. For manufacturers, low prices help shore up margins as raw material input prices have fallen. For producers, it’s the opposite story. Going forward, adequate supply rationalization for both metals on a global scale is needed to help support prices.

Contrary to a dreary pricing backdrop, housing and employment statistics have improved since last year. Both single-unit and total housing permits are up 36 percent year over year, as manufacturing employment gains have helped boost activity in the housing markets. Idaho, Montana and Oregon have showcased the strongest growth in permits, while manufacturing employment improved the most in Washington and Idaho.

Going forward, the outlook remains uncertain. The looming U.S. fiscal cliff coupled with cloudy tax and health care policies have discouraged business investment and forced many participants into wait-and-see mode. The effects of this behavior may restrict any material pickup in buying from downstream sectors until clarity on these specific issues has been delivered. As always, metal market watchers should be cognizant of markets abroad, specifically in China and Europe. Although central bank actions have provided the markets with record amounts of liquidity, it is business confidence that needs to come back in order to put investment capital on the right track.

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Data provided by Bloomberg

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