Why Steel Play Investors Should Monitor Architectural Billing
In the previous parts of this series, we’ve analyzed the demand indicators of residential construction. Now, we’ll look at the indicators of non-residential construction activity. Please note that non-residential construction accounts for almost two-thirds of total construction spending in the United States.
This includes both public and private spending. Nucor (NUE) and Gerdau (GGB) are leading suppliers to the non-residential construction industry. One of the indicators that analysts use for non-residential construction is the architectural billing index. Let’s discuss it in detail.
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Architectural billing index
The architectural billing index is based on a survey of architects. Participants answer whether their billing increased, decreased, or stayed the same in the month. A value above 50 indicates an increase in billing. This index serves as a leading indicator for non-residential construction industry.
Simply put, an increase in architectural billing means more buildings are expected to come up. Higher construction activity leads to higher demand for steel products like rebars, joists, and girders.
Index above 50
The chart above shows the movement in the architectural billing index. As you can see, the index has been above 50 for eight months in a row. The latest reading in December 2014 came in at 52.2. The index stood at 50.9 in November.
An increase in the architectural billing index is a positive sign for the steel industry. Steelmakers like U.S. Steel (X), AK Steel (AKS), and ArcelorMittal (MT) should benefit from higher construction activity. The SPDR S&P Metals and Mining ETF (XME) also benefits from higher construction spending. It’s ~35% invested in steel plays.
Investors in steel companies should also monitor the consumer confidence index. We’ll discuss it in detail in our next part.