Bruce's Commentaries / 12.10.2019

Favorable Outlook with Contradictions

Favorable Outlook with Contradictions

Favorable Outlook with Contradictions - Image

Favorable Outlook with Contradictions

 

Our economy is in its 11th year of expansion. Over 266,000 jobs were created last month, putting unemployment at 3.5%, a 50-year low. However, the number of jobs created in the three years that Trump has been in office is 13% lower — 1 million less – than the last three years that Obama was in office. Interest rates are extremely low, as is inflation. If any economist had forecast the current economic scenario prior to 2009, they would have been laughed at, ridiculed and deemed an idiot. Well, here we are.

Federal Reserve Chair Jerome Powell recently commented, “At this point in the long expansion, I see the glass as much more than half full. With the right policies, we can fill it further, building on the gains so far and spreading the benefits more broadly to all Americans.” That, too, would have been a radical statement prior to this expansion. Thinking has changed.

The contradictions continue. I always thought the ISM and PMI moved in the same direction, but that’s not the case this month. The ISM was down slightly and way below forecast. At 48.1, it has been in contraction for four months. The PMI rose .9% to 52.2%, a seven-month high, which is attributed to gains in business equipment after months of declines; business equipment demand increased in October by the most since the beginning of the year. That was reflected in nondefense capital goods new orders, except aircraft, which are up .8%, compared with last month’s drop of .8%. Durable goods also rose .6% instead of the expected drop of .9%. The November Material Handling Industry Business Activity index remains in expansion for all categories except exports. However, it showed declines in all the categories it surveys. And in the real world of manufacturing, the Shapiro Scrap Activity Index for our top 50 nonferrous manufacturers remained the same as last month, and it was up over 7% from last year.

The Chinese Caixin is in expansion at 51.8, up slightly from last month. The official Chinese PMI went into expansion in November when it increased from 49.3 to 50.2. The Global PMI — the sum of the US ISM, Caixin, and Eurozone — was up to 49.8 in November. Consumer confidence in the US remains strong and is reflected in the strong retail sales since Black Friday.  Spending is up .3% and personal income is up 1.3%. The NFIB Optimism Index rose the most in November since May 2018. It is still below its peak at the beginning of 2018, but seven of the 10 components were up.

Primary aluminum on the LME was up over $20 per ton. The Midwest premium continues to drop, and the spot prime price was down 1 cent per pound. CRU still forecasts a decrease in overall consumption next year. The Chinese continue to produce more aluminum and are forecasting a 7.1% increase in production. Simultaneously, a slowdown is occurring in worldwide manufacturing. And the contradiction is that prime scrap prices rose 1 cent for the first time since March. Secondary aluminum prices were down 1 cent. But with the end of the GM strike, 380 aluminum ingot rose slightly for the first time this year and may have bottomed out. Scrap steel prices also rose for the second consecutive month. However, the price is more than 25% below January’s. Even though steel mills are running at over 80% capacity, some of the older mills have closed or slowed down. Iron ore prices are at a seven-month low. HRC is in the mid $500s, off of the $500-per-ton low. Copper is flat and stainless steel prices fell sharply as nickel prices dropped nearly 20% and stainless mills decreased their demand.

If an agreement emerges for Phase 1 of the trade wars, maybe we will experience less uncertainty and more stability. This could lead to more business investment, which has been lagging during the trade wars. That would be a nice Christmas gift for all of us. We wish you all Happy Holidays and a Healthy New Year.

“Learn from yesterday, live for today, hope for tomorrow. The important thing is not to stop questioning.”  -Albert Einstein

Works safe. Work smart. Profits will follow.