Stuart Hoffman Gus Faucher William Adams Kurt Rankin Mekael Teshome

Chief Economist Deputy Chief Economist Senior Economist Economist Economist

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Summary
Fiscal stimulus to accelerate economic growth and boost steel demand

The economic expansion will accelerate to 2.4 percent in 2017 and 2.7 percent in 2018, from 1.6 percent in 2016.
Tax cuts and increased defense and infrastructure spending will support steel demand.
Prospects are brightest for construction equipment, autos and aerospace.
Restrained oil price increases and low agricultural prices will limit improvement in demand from energy-related and
agricultural machinery.
A strong dollar, faster inflation, interest rate hikes and trade disputes pose downside risks to the outlook.

Steel producers have a good year ahead of them as U.S. economic growth accelerates and boosts steel demand. The
economic expansion is set to accelerate to 2.4 percent in 2017 and 2.7 percent in 2018 from 1.6 percent in 2016 as weights
from the energy downturn and excess inventory accumulation lift (Chart 2). In addition, the government sector is poised to
promote growth after fiscal austerity caused it to be a weight on the economy for much of the time since the Great Recession.
Congress and the Trump administration will likely pursue expansionary fiscal policy through tax cuts and increased spending
on infrastructure and defense. Such policies will boost economic growth by late 2017 and extend through 2018.

The pickup in economic growth will boost demand for steel, especially from the construction industry. Higher infrastructure
spending will help lift non-residential construction by 3.6 percent in 2017 and by 3.3 percent in 2018 (Chart 3). This will be
much better than the 2.6 percent and 4.4 percent contractions in 2016 and 2015, respectively. Independent of the change in
fiscal policy, real estate development has been gaining momentum as the maturing economic expansion lifts construction of
offices, lodging, commercial structures and amusement facilities (Charts 4& 5). On the residential side, declining
unemployment, slowly improving income growth, generally high levels of affordability and low mortgage rates will enable
homebuilding to march higher by a moderate pace of 3.6 percent and 2.8 percent in 2017 and 2018, respectively (Chart 6).

While fiscal stimulus and recovering real estate markets will support steel demand in construction and related equipment, low
commodity prices will limit demand growth for mining and agricultural machinery. The outlook for the oil and gas industry is
improving but the industry is unlikely to bounce back in an attention-grabbing way. The number of active rotary rigs fell from a
peak of 1,931 rigs in September 2014 to a low of just 404 rigs in May 2016 as energy prices collapsed. The rig count has
since risen to 659 as of mid-January as oil prices crept up (Chart 7). Nevertheless, PNC Economics assumes the West Texas
Intermediate crude price will end 2017 close to $50 per barrel as higher prices entice drillers to increase output. The increased
output will restrain oil prices which, in turn, will limit the pace at which oil and gas investment will recover. Although President
Trump has stated his preference for coal and natural gas, low market prices will ultimately keep investment in those sectors
rising slowly. In agriculture, farm cash receipts are likely to be flat in 2017 as agricultural prices have yet to recover the way
energy prices have (Charts 8 & 9). This will limit the potential for farm equipment demand to recover.

Besides construction, autos and aerospace will be bright spots in the outlook for steel demand in 2017. PNC Economics is
forecasting auto sales of 17.5 million units in 2017. This will be equal to 2016s level, which was the best year on record
(Chart 10). Pent-up demand from the slow economic recovery has been mostly satisfied, so large gains in sales are unlikely.
Still, auto demand will be bolstered as the labor market reaches full employment in late-2017 and the jobless rate hits a cycle
low of 4.5 percent. Also, income growth is gaining momentum and credit remains cheap. The aerospace industry will also
enjoy strong global demand for fuel-efficient civilian aircraft that will keep its backlog of orders large. On the military side, the
prospect of increased defense spending by the new administration is raising hopes that steel demand for use in military
hardware will improve.

Despite the upbeat projection for economic growth and steel demand, downside risks to the outlook are mounting. Trade
disputes in addition to a rapidly appreciating dollar could cut into exports and weigh on economic growth (Chart 11). The
probability of recession could increase in 2018 as a large fiscal stimulus is combined with a tight labor market. This could lead
to faster than expected inflation. In response, the Federal Reserve could be forced to raise interest rates quickly which could
kill the expansion (Chart 12).

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 Chart 1: U.S. Steel Demand By Source Chart 2: Economy Bouncing Back from Extended
Deceleration
5 10
Container, 4% Defense, 3% Other,
PNC forecast
Real GDP, annualized % change (L)
4% 4
Appliance, 4% 9
3

2
8
1
Energy, 8%
Construction, 40% 0 7
09H1 10H1 11H1 12H1 13H1 14H1 15H1 16H1 16H2 17H1 17H2 18H1 18H2

Machinery and -1
Equipment, 12% 6
-2 Unemployment rate, % (R)

-3
5
-4

Automotive, 25% -5 4

Sources: Bureau of Labor Statistics; Bureau of Economic Analysis; PNC

Source: American Iron and Steel Institute

Chart 3: Fiscal Stimulus Will Boost Nonresidential Chart 4: Increased Architecture Billings Point to
Construction More Construction
550 30
Real private investment in nonresidential PNC 56
structures, % change yr ago, SAAR (R) forecast AIA Architecture Billings Index, total,
diffusion index
20
500 54

10 52
450

0 50
400
-10 48

350
-20 46
Real private investment in nonresidential Values greater than 50 indicate an increase in
structures, $ mil, SAAR (L) billings. Scores below 50 indicate a decrease.
300 -30 44
'05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16E '17F '18F '14 '15 '16
Sources: Bureau of Economic Analysis; PNC Source: The American Institute of Architects

Chart 5: Maturing Economic Expansion Lifts Chart 6: Residential Real Estate Continues to Heal
Commercial Real Estate Development
25 1,800 450
PNC forecast
Value of construction put in place, % change, 2016 (expected) Single-family housing starts, ths., SAAR (L)
1,600 400
20
Multi-family housing starts,
1,400
ths, SAAR (R) 350
15
1,200
300
10 1,000
250
5 800
200
600
0
150
400
-5
200 100

0 50
'05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16E '17F '18F
Source: Census Bureau Sources: Bureau of Labor Statistics; Bureau of Economic Analysis; PNC

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2
 Chart 7: Prices Are Not High Enough to Spur Large- Chart 8: Recovery of Farm Incomes Still A Ways Off
Scale Investment
110 2000 140
Average active rotary rigs, #, (R )
100 1800
130
Prices received by farmers, livestock production,
90 1600 index, 2011=100, NSA
120
80 1400
110
70 1200
100
60 1000

90
50 800

40 West Texas Intermediate spot price, $ per 600 80 Prices received by farmers, crop production,
barrel, (L) index, 2011=100, NSA
30 400 70
'14 '15 '16 '14 '15 '16
Sources: Energy Information Administration; Baker Hughes Incorporated Source: U.S. Department of Agriculture

Chart 9: Ag Machinery Demand Will Be Subdued Chart 10: Pent-Up Auto Demand Satisfied But Strong
240
Total farm wheel tractors, 4 qtr moving
30 Consumer Fundamentals Still Support Sales
sum, ths (L) 25 20
230 PNC forecast
New vehicle sales, millions, SAAR
Total farm wheel tractors, 20
220 % change yr ago, 4 qtr 18
moving sum (R ) 15
210
10
16
200 5

190 0 14

-5
180
12
-10
170
-15
10
160 -20

150 -25 8
'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17F '18F
Source: Association of Equipment Manufacturers Sources: Bureau of Economic Analysis; PNC

Chart 11: Strong Dollar Will Pressure Exports, Chart 12: Baseline Forecast Calls For Slow Rate
Additional Appreciation Will Hurt Even More Hikes But Anything Faster Would Be Risky
140 14.0 6
PNC forecast
PNC
135 13.5 forecast
Real exports, % of GDP (R )
5 Federal Funds rate, %
130 13.0

125 12.5
4 Core PCE Deflator, 2009 = 100,
120 12.0 SAAR, % change year ago
115 11.5 3

110 11.0
Feds inflation target
2
105 10.5

100 10.0
1
95 Trade-weighted dollar, broad 9.5
index, Jan. 97=100 (L)
90 9.0 0
'05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17F '18F '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16E '17F '18F
Sources: Bureau of Economic Analysis; Federal Reserve; PNC Sources: Bureau of Economic Analysis; Federal Reserve; PNC

Visit http://www.pnc.com/economicreports to view the full listing of economic reports published by PNCs economists.

Disclaimer: The material presented is of a general nature and does not constitute the provision of investment or economic advice to any person,
or a recommendation to buy or sell any security or adopt any investment strategy. Opinions and forecasts expressed herein are subject to change
without notice. Relevant information was obtained from sources deemed reliable. Such information is not guaranteed as to its accuracy. You
should seek the advice of an investment professional to tailor a financial plan to your particular needs. 2016 The PNC Financial Services Group, 3
Inc. All rights reserved.