Just Another Case
of Mid-Year Jitters?

As we hit the mid-year mark of 2006, some people are getting nervous and twitchy about the second half—as they do every year about this time.

In last June’s column, I reported that “the market is a very uncertain place right now. The economy is sending mixed signals, with healthy GDP numbers offset by disappointing job growth, especially in the manufacturing sector.”

The situation is similar today. The Metals Service Center Institute reported that shipments of steel products from U.S. and Canadian service centers declined in April from year-earlier levels for the first time in eight months. Though steel shipments were up about 3 percent overall for the first four months of 2006, inventories appeared to be creeping upward, too, hinting at a possible slowdown in orders. Steel imports also were up 29 percent year-to-date, which either reflects strong demand or portends increasing pressure on prices.

On a macroeconomic level, the Institute for Supply Management reported that U.S. economic growth appears to be slowing. “The slower growth is evidenced by a significant loss of momentum in the last four months as the New Orders Index has slipped from 61.9 percent in February to 53.7 percent in May. Prices, driven by raw materials costs, are a concern,” said ISM officials.

ough the manufacturing sector grew in May for the 36th consecutive month, it also showed signs of a slowdown. At 54.4 percent, ISM’s May Purchasing Manager’s Index, was down 2.9 percent from April (any reading above 50 indicates growth).

Recent employment data also has contributed to the market’s jitters. The Bureau of Labor Statistics reported a gain of just 75,000 jobs in May, far short of analysts’ expectations of 175,000. Ignoring months affected by the Gulf Coast hurricanes, May’s gain is the smallest since July 2004.

Earlier this month, Federal Reserve Chairman Ben Bernanke stated that economic growth appears to be moderating and inflation is nearing the high end of an acceptable range. The U.S. economy is “entering a period of transition,” he said. “The anticipated moderation of economic growth now seems to be under way.” Of course, his comments fueled speculation that the central bank will increase interest rates for the 17th straight time at the end of this month.

“The economy is now facing headwinds that were not evident in prior months, including higher interest rates, less stimulus from the housing sector and higher energy prices,” added analysts from the Economic Policy Institute, who urged the Fed to “hold interest rates steady to avoid pouring more water on a fire that is showing worrisome signs of generating less heat.”

Yet, despite all these troubling economic indicators, mills and distributors report strong order activity for most metal products through the third quarter. Optimism was palpable at last month’s MSCI annual meeting in Florida, where executives were clearly pleased with the ongoing strength of their industry’s performance.

Personally, I take heart that since last June’s column, the metals market has defied negative expectations and experienced another very prosperous 12 months. Let’s hope it happens again.