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The Clearest Windows Into Weakness

I like to picture an economy as a house of interconnected rooms that are only visible, in sections, through windows from the outside.

Here in the United States, I see four kinds of windows into our present economic house:

  • Windows into the rooms where a booming housing market once lived have been boarded up for a few years now, spray-painted like those hurricane-battered homes in New Orleans to indicate they are empty.
  • Other panes are coated in a film of murky uncertainty and confusion, permitting no light to reveal what's inside. Media punditry, political rhetoric, and misinterpreted data swirl about those rooms in a cacophony of errors.
  • And then there are the steelmakers. With a reliability all their own, I believe that clear windows into the foundries of a nation's metalsmiths yield more direct insight into the underlying health of an economy than most other vantage points. I believe that sustainable recovery is impossible without the widespread participation of the industrial base, and so I continue to hold vigil outside their window.

Steelmakers have observed a rather sudden reversal of the unexpected strength felt through the first several months of this year. Steel prices fell suddenly in May, and just in the past week prices for hot-rolled coil steel products in the U.S. slipped nearly 4%.

AK Steel (NYSE: AKS  ) achieved resilient profitability of $0.24 per share for the quarter, handily beating estimates that called for just $0.07 per share. The result would have been more than 40% stronger if iron ore prices had tracked the company's expectations, but this year's abandonment of annual benchmark pricing by Vale (NYSE: VALE  ) and others has introduced greater volatility to cost structures. From a prior forecast for a 30% increase, AK Steel now sees a 65% surge in iron ore prices over the 2009 benchmark price.

Peering through AK Steel's window, we find the company purposefully dialing back about 5% of its capacity in response to a recent slowdown in order intake rates. When considered in the context of emerging caution from all the domestic steelmakers, we get a snapshot of a steel industry that's operating more capacity than real demand can support.

After turning in six consecutive quarterly losses, and after observing a corroborating fall-off in order rates, U.S. Steel (NYSE: X  ) sees deterioration of its operating performance for the second half. Steel Dynamics (Nasdaq: STLD  ) conveyed caution in its outlook for the second half, and Schnitzer Steel (Nasdaq: SCHN  ) foresees deteriorating sales volumes meeting tighter profit margins. Nucor (NYSE: NUE  ) is the voice in the industry that lays the stark reality on the table. Nucor warns of "the possibility of a double-dip recession, or at minimum a significant slowing of growth."

If you want a rosy, upbeat view of the economy, I believe they have windows for that. From where I stand, however, I am sorry to say I see the fires of American industry growing dim once again.

In a recent Motley Poll, readers were nearly evenly split in their expectations regarding the voyage that awaits the American economy overall: 49% of respondents called for a double-dip recession (or worse), while 51% expected a slow recovery (or better). Your opinion is needed to break the tie, so please take a moment to vote in that poll, and to express your own outlook for the American economy in the comments box below.

Fool contributor Christopher Barker is the Nat King of Coal and the wild boar of iron ore. He can be found blogging actively and acting Foolishly in the Motley Fool CAPS community under the user name TMFSinchiruna. He tweets. He owns shares of Nucor, which is a Motley Fool Stock Advisor recommendation. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a stainless disclosure policy.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 28, 2010, at 4:28 PM, dragonLZ wrote:

    Cato said: It is a wise move to use steel as a gauge of economic health.

    I said:

    I agree, and here is what I see (on 5 best steel plays):

    AKS, Price in Feb. 09: $6.18, Today: $13.91 (return +125%)

    CAS, Feb. 09: $7.29, Today: $14.84 (+104%)

    WOR, Feb. 09: $8.20, Today: $14.25 (+74%)

    X, Feb. 09: $19.67, Today: $44.28 (+125%)

    GGB, Feb 09: $5.23, Today: $14.69 (+181%)

    Two more plays worth mentioning:

    STLD (+71%) and SCHN (+61%)

    Btw., NUE is a stinker (good for dividends and nothing else)...

    I know most people think stocks will (or are supposed to) always go up in a straight line, and as soon as the market start going down they think that's a sure sign the market will "double dip".

    Well, let me tell you something: Most people don't make money in the stock market...

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