Conference Report: MSCI Forecast
MSCI Economic Summit 2017, As Good as it Gets?
By Jonathan Samples
on Nov 15, 2017
Growth in U.S. economy brings positive outlook for many end markets.
The year started with high expectations. A Republican president and a GOP-controlled Congress gave many business leaders hope that Washington would put forth a bevy of pro-growth policies in the first year of the Trump administration. That hasn’t happened yet, but Michael Gregory, managing director and deputy chief economist at BMO Capital Markets, isn’t worried.
“The good news here is the economy doesn’t really need it. We’re actually getting that momentum to build without any kind of help from Washington,” said Gregory, who spoke at last month’s MSCI Economic Summit Conference.
The reason, according to Gregory, is business and consumer confidence began to soar after the November election, and that’s good news for the economy. “The thing about high confidence, if it lasts long enough, you begin to get a little more willingness to spend, to invest and that tends to be very positive for economic growth.”
The effects of that confidence have trickled down to metal industry executives, as well. For the most part, they’re feeling pretty good about the outlook for many of the end markets they serve.
“We’re really seeing fundamental demand being better, versus this focus early in the year on what the government might do to augment demand,” Olympic Steel CFO Richard Marabito said during a panel discussion at the September summit.
The annual conference brought together industry leaders from across the country to discuss the economic conditions and policies affecting the entire industrial metals supply chain, as well as the many end markets served by the industry. From aerospace and automotive to con-struction and food service, the outlook for many of those markets is as good as it gets.
The Big Picture
Across the board, U.S. metals shipments are up, according to M. Robert Weidner, president and CEO of MSCI. Year-to-date aluminum shipments are up 7.3 percent, stainless steel is up 4.4 percent and carbon steel is up 3.1 percent. In Canada, stainless is up 5.8 percent and carbon is up 3.4 percent through August, with aluminum down 0.3 percent year to date.
And overall, momentum is starting to build throughout the entire U.S. economy. Gregory attributes that momentum to several factors: consumer spending, the housing market and a pickup in business investment. “We’ve got a consumer spending level that’s pretty sturdy, housing is going to pick up, we’ve got capital spending continuing to recover from an unprecedented and very rare contraction, and a little bit of inventory investment,” he said. “It all bodes pretty well for growth.”
Gregory expects GDP growth in the low 2 percent range for the foreseeable future, which he said is enough to take in slack from the economy, help unemployment continue to drift down and increase demand in many important sectors.
Taken as a whole, these economic factors are supplying a general air of positivity throughout the metals industry. “I have to agree with what Mike Gregory said, it’s about as good as it gets,” said Michael Petersen, CEO of Petersen Aluminum Corporation, Elk Grove Village, Ill.
Olympic’s Marabito agrees. “We’re seeing across the board increases year over year. Pipe and tube product is up, stainless and aluminum products are up, carbon flat, plate; they’re all up,” he said. “I think it’s a good environment from a shipping perspective.”
It wasn’t all good news, however. While demand remains high in most metals markets, factors such as labor shortages and possible trade negotiations are causing some to temper their expectations.
“Housing is slowing down a little bit,” Gregory said. “Shortages in construction workers in that industry is making it very difficult to expand a lot.”
Here’s a more in depth look at two of the 16 end markets featured during the MSCI Economic Summit.
Truck and Trailer
For suppliers to the manufacturers of truck and trailer equipment, there are two things to know to gauge market performance: freight capacity and equipment needs.
“If you understand the freight market, you are going to understand what’s happening in the truck and trailer equipment market,” said Eric Starks, CEO and chairman of FTR Transportation Intelligence. Starks led the truck and trailer breakout session at last month’s conference, and he thinks there’s a lot to be optimistic about for metals suppliers to the market.
Put simply, the more freight that needs to be moved, the more equipment needed to move those goods. The bulk of that freight comes from the manufacturing sector, and Starks said there are several indicators suggesting an uptick in the amount of manufacturing goods that need to be moved. The ISM Manufacturing Index is above 50, and core capital goods orders indicate that business activity is showing signs of improvement.
U.S. truck freight levels are also increasing at a healthy pace, according to Starks. “Right now, the data suggests that we are seeing somewhere in that 4 to 5 percent year-over-year growth,” he said. “They are moving more and more loads. This is likely to continue on an upward trend in the short term.”
In addition to freight levels, several other indices are showing high demand for truck and trailer equipment. Looking at capacity utilization for Class 8 trucks and monthly market indicators, Starks sees equipment needs above and beyond normal replacement levels.
“We are above replacement demand levels now, and we are starting to move higher,” he said. “We would anticipate, as we move into late Q3 and Q4 that we will see a noticeable increase in order activity.”
These and other factors prompted FTR Transportation Intelligence to increase its forecast for the Class 8 market to 300,000 units in 2018. “We very much believe in this particular number,” Starks said. “We believe that there is going to be a very noticeable bump in this market in 2018.”
That positive outlook extends to the trailer equipment market as well, with order activity currently up 40 percent year over year. Starks sees this as a sign the market is heading into the normal order season on a high note. FTR’s forecast for U.S. trailer production is 281,000 units in 2017 and 285,000 units in 2018.
“When we look at what’s happening on the trailer side, that is a fairly flat market but at very high levels,” Starks said. “There’s a lot of stability there.”
Food Service, Food Processing, and Medical Equipment
Metal suppliers to the food service and food processing markets should expect modest growth in the upcoming year, while suppliers serving the medical equipment sector are in for a much more robust outlook.
One of the main drivers for all three markets is housing. The way John Anton, ferrous metals industry analyst at IHS Pricing and Purchasing Service, explained it: when you add more housing, you have to add more commercial construction. That means more restaurants, grocery stores, doctors’ offices and hospitals.
Currently, the housing market isn’t performing as well as some would like. Some factors contributing to this underperformance are a shortage of construction workers, high student loan debt and low entry-level wages.
The good news, according to Anton, is that despite these drags, the housing market is on a positive trajectory. “It is growing, it will increase, and this will help drive appliances and it will help drive subsidiary construction around it; food service and to some extend medical.”
Looking at food production, Anton said this will be a solid end market in coming years but cautioned against expecting spectacular performance. Employment and industrial production indices suggest that there is growing demand for food service equipment.
“Commercial food producers have squeezed more out of less and that can only go on for so long,” Anton said. “They’ve squeezed all they can; now they have to add people. If you’re adding people, you have to add equipment.” He expects employment to grow between 2 percent and 2.5 percent in the industry through 2019, with long-term growth rates between 1 percent and 1.2 percent through 2027. “2018 and 2019 are going to be your good years,” he said.
Conversely, Anton projects less spending on construction related to food processing over the next two years. “Things are going to be relatively flat,” he said. “Don’t expect great growth rates going forward, but expect relatively stable demand.”
As for specific types of food, major crops should remain stagnant over the next two years, while the meat and dairy sectors are projecting strong growth going forward.
The medical devices end market is one area where Anton sees room for significant growth, primarily because demand is increasing. That demand is driven by population growth, an aging population and new housing construction.
And while unresolved federal issues, such as the ongoing debate over the future of the Affordable Care Act, pose a potential headwind in this sector, Anton said there is an offset. Because consumer demand in the market is not voluntary, there will be a degree of stability when it comes to the need for medical devices and healthcare.