Industrial production slips overall but rises for construction items; building permits up

April 20, 2004
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Industrial production (IP) fell 0.2% in March, seasonally adjusted, after rising steeply in February (0.7%) and January (0.8%), the Federal Reserve announced. Manufacturing IP was flat after rising 1.1% in February and 0.3% in January. Since March 2003, manufacturing IP has risen 3.6%.

Capacity utilization in manufacturing slipped to 75.2% of capacity from 75.3% in February (originally estimated as 75.2%). This is significantly higher factory utilization than the 73.3% recorded in March 2003 but is probably not enough to trigger demand for factory construction. Production of construction supplies rose 0.6% in March, 0.5% in February, and 4% since March 2003. The Fed noted, “Gains in construction machinery and in mining machinery helped to boost output in the industrial and other [business equipment] category.”

Building permits, a reliable indicator of near-term housing construction, rose at a 1.9% seasonally adjusted annual rate from February to March, the Census Bureau reported. For the first three months of 2004, permits are up 12% from the first quarter of 2003, with single-family permits rising 15%, 2-4 unit permits climbing 24%, and permits for buildings with 5 or more units slipping 0.3%. Housing starts rose 6.4% for the month and 13% for the quarter.

There are mixed indications as to the future course of homebuilding. Builder confidence in the market for new single-family homes rose strongly in early April, according to the National Association of Home Builders' latest Housing Market Index, released Thursday. The index rose five points to 69 in April, bringing it back up to its level in late 2003 and January 2004.

Nevertheless, there is a strong likelihood that housing starts will slow down, perhaps after a final burst of activity as consumers try to beat rising mortgage rates. Freddie Mac reported that the average mortgage interest rate for 30-year fixed mortgages rose to 5.89% this week, up half a point from last month's low of 5.38%. The rate on the 10-year Treasury note, an instrument that influences long-term mortgage rates, has risen 0.67 percentage points, suggesting that further mortgage rate increases are imminent.

Average hourly earnings in construction rose just 1.8% in the year ending in March, the Bureau of Labor Statistics (BLS) reported. The construction average, $19.08 per hour, was 23% higher than the all-industry average. But the wage picture could begin to change soon. In another report, BLS said the consumer price index for urban wage earners and clerical workers (CPI-W) rose 0.5% in March, for the third straight month. If the increases that have occurred since December occur at the same rate all year, the full-year jump will be 6.8%, a dramatic turnaround from the 1.4% over the past 12 months. The CPI-W is used to adjust many labor contracts in construction and other industries.

Retail sales leaped 1.8% from February to March, according to a report from Census, which adjusted for normal seasonal variation, holiday timing (Easter was April 11 this year, April 20 last year), and trading days (four weekends in March 2004, five in March 2003). Different retail categories vary in their sensitivity to these calendar vagaries. For instance, March clothing sales vary based on whether Easter comes in or near March. Two types of variation are not adjusted for: unusual weather and prices. Thus, the absence of widespread wet or cold weather in March can boost sales at building material and garden equipment and supplies dealers (up 11% compared to February, up 21% compared to March 2003) and lower IP at utilities (down 2.3% from February).

The giant gains in building materials sales are also likely due to price increases for wood, copper, and steel products that have affected construction companies as well as home-improvement contractors and do-it-yourselfers. Prices for plywood and oriented-strand board have surpassed last September's five-year highs. Yesterday, lumber futures at the Chicago Mercantile Exchange “rose and established fresh contract highs in the May, July and September contracts,” the Wall Street Journal reported. “Scrap [steel] has dropped in price by as much as $60 a ton this month as warmer weather and recycling by businesses to take advantage of the recent prices have boosted supply,” the Wall Street Journal reported.

“Less scrap is being exported to China, where demand has leveled off for now ... Some analysts note dropping scrap prices won't have as great an effect on integrated steelmakers, which rely on different raw materials. AK Steel Holding ... plans to increase prices for carbon steel products by $150 a ton starting on May 1 ... Peter Marcus, a director at research firm World Steel Dynamics in New Jersey, said raw-material costs have risen between $74 and $177 per ton of steel made at integrated mills that use blast furnaces to convert iron ore into steel.” Construction firms have been heavily affected by scrap surcharges; none has reported a drop in finished steel prices yet.

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