The materials market appears to be stabilizing this summer after a 28% fall in production over three and a half years. Sales were approximately steady in June and production fell only 0.1% in July when orders rose 1.4%. Inventories held by manufacturers have been dropping since November and have now fallen enough — with steep production cuts — to push the month end inventory/sales ratio to 1.43 from a peak of 1.52 in December and January.

CAUTION: The Census Bureau indexes for construction materials are overstating the recent improvement in the market. The indexes are constructed by dividing the use of materials between construction, manufacturing and other end markets. This allocation uses the historical shares of purchases of steel, plastics, glass and other materials by each end market. The Census Bureau has no specific information on the share of steel production shipped to the construction market.

As a result, the abrupt rise in manufacturing activity in the late spring, especially for motor vehicles, causes too much material sales to be assigned to construction. Stability in construction materials production and shipments will probably not happen until the fall, possibly even the winter.

This is still at least a weeks’ too much construction materials inventory held by manufacturers so expect production to be just short of steady for the rest of the year in order to keep pushing the inventory/sales ratio down to the 1.30 range.

However, production of materials specialized to the residential market will pick up progressively in the second half of 2009. Recovery in nonresidential markets will come early next year.