US Steel Cites Improved Demand; But From Where?

If you are into scouring the economic landscape for signs of good news - and by good news we don't mean second derivative technicalities - then you may have noticed the limited yet positive news from US Steel (X), which stated in it's recent earnings announcement that it will be increasing production capacity to meet demand from new orders. This news was initially denounced as entirely "stimulus" related; an assertion that may have overlooked some relevant facts. Below is what we know for certainty regarding US Steel's latest move:

1. The particular facility that has benefited from the capacity increase is Granite City Works, located in southern Illinois.
2. Granite City produces hot rolled, cold rolled, and coated sheet steel product for the "construction, container, piping & tubing, service center, and automotive industries.

From here we can basically rule out several industries as the source of new demand. Statements made by the Company's Chairman and CEO John Surma during the Q2 conference call would indicate that Tubing was not a bright spot for the Company during the most recent quarter:

"This severe downturn was primarily driven by the combination of lower demand due to reduced drilling activity, and extremely high inventory levels in the tubular supply chain caused by unprecedented levels of unfairly traded and subsidized Tubular imports from China. The Tubular results also reflects idle facility carrying cost of approximately $25 million and lower cost to market adjustments."

Additionally, the Census Bureau's latest report on construction starts doesn't indicate much of any uptick in construction spending.

That leaves the automotive industry as the most likely candidate. A comparison between April and May of 2009 light vehicle sales numbers shows that GM, Ford and Chrysler logged month-to-month increases of 11%, 20%, and 3% respectively. Furthermore, we would suspect that the automakers anticipated a successful running of the "Cash for Clunkers" program, which in fact nearly exhausted it's $1Billion budget in one week alone.

With the source of US Steel's fresh demand likely identified, the question becomes whether this demand is of a sustainable nature. That depends. It's probable that the White House will rush to extend funding for what has turned out to be the most popular stimulus extravaganza as of yet. Unfortunately, this program could simply lead to a double-dip style decline in new car sales, as anyone who has remotely considered buying a new car will likely take advantage of the government's recent auto largess. The best hope for US Steel et.al is that, by the time "Cash for Clunker" demand begins to fade, additional rounds of stimulus money will have found their way into the real economy. For now, that appears to be the best hope. Sphere: Related Content

June Retail Sales Disappoint All But Exxon

The Commerce Department's monthly retail trade and food services report for June, released today, provided the world with a headline that month to month sales volume was up by an estimated 0.6%. We emphasize "estimated" because the figures are compiled from a stratified random sample of 5000 retail and food service firms. More importantly though, when you strip out auto and gasoline sales, the June numbers logged a monthly decrease.

We don't pay much homage to the uptick in auto sales, as that industry is zero-percent-financing it's inventory away in sub prime bubble like fashion. We even know a person who timed the purchase of her new Camaro - financed at zero percent of course - prior to allowing a soured real estate investment slip into foreclosure. She must assume the car can last seven years. This evidence may be anecdotal, but we challenge anyone to claim that it is not happening on a widespread basis.

The retail numbers should only continue along the current trend (declining), as jobs continue to be lost, and wages continue to be cut. Furthermore, severances (for those lucky enough to receive such) and unemployment benefits for many are reaching the end of their precious lives. Spending will be increasingly devoted to essentials, and the trend towards private label grocery products will accelerate. In case you haven't noticed, private labels have been aggressively grabbing prime shelf locations. A couple years ago, our statistics class conducted a campus-wide taste test between "name brand" and "private label" products. For nearly every variety of product (Coca-Cola the notable exception), there was no evidence of a statistically significant preference for the name brand amongst the tasters. People will continue to figure this out, dragging down the retail numbers in a slow and steady fashion.

June US Retail Sales Report Sphere: Related Content