Steve Kline, Jr. has been providing financial analysis and economic forecasts for Gardner Publications, Inc. (publisher of Modern Machine Shop) since 2005. While he has a degree in civil engineering from Vanderbilt University and a MBA with an emphasis on finance from the University of Cincinnati, Steve views forecasting as more of an art than a science. Therefore, his analysis focuses on trends between different data sets to determine where the economy (and, more importantly, the metalworking industry) may be headed. The study of economics is his life’s passion, hence the T-shirts of his favorite economists. Yes…any time he wears these, his wife points out that he truly is a geek.
The consumer durable goods industrial production index was 94.9 in April 2012. This is the index’s third highest value since February 2008. The only two months higher in value were February and March of this year. April industrial production was 13.3 percent higher than the production level in April 2011. This is the fastest growth rate since June 2010. Three of the last four months, the one-month rate of change has been above 10 percent. This is pushing the annual rate of change to grow faster as well—it has done so each of the last six months.
This means that machine shops are seeing really good business at the moment. And, it is why capital equipment and tooling continue to be in high demand.
A good leading indicator for consumer durable goods industrial production is consumer durable goods spending. Spending is at the highest level it has ever been. The one-month rate of change shows consistent growth, but the annual rate of change has shown slower growth each of the last seven months. While the annual growth is slower, it is still at quite a fast rate. Because the growth is still relatively fast and reshoring is a real phenomenon, industrial production is growing faster even when the leading indicator says it should be slowing down (there is very tight historical relationship between spending and production). The divergence from the historical relationship can continue for some time due to the specifics of this cycle. But, if consumer durable goods spending slows enough, then it will start to be a drag on production.
To see more information on industrial production and its leading indicators go here.
According to USMTO, machine tool orders in March 2012 were 2,304 units and $458,506,000. This is the fourth strongest month for machine tool unit sales since September 2008. However, this is the first month since the recovery began that unit sales were less than the same month one year ago. But, the one-month rate of change in unit sales for March 2012 was just slightly negative, at -5.4 percent. This isn’t a surprise though, at least to me. My forecast for machine tool unit sales in March was 2,300. The annual growth rate for unit sales is still reasonably strong at 25.7 percent, but that rate has now slowed for 10 consecutive months.
Two of the most important leading indicators for machine tool sales are exchange rates and industrial production. Against all currencies, the dollar has gained value in each of the last five months, and against the major currencies, the dollar has gained value in each of the last four months. Even though the annual rate of change for both is still negative, this trend in the dollar typically points to slower machine tool sales. However, industrial production is trending the other direction. The one-month rate of change for industrial production has grown more than 8.0 percent each of the last three months. The annual rate of change has grown has grown faster for five straight months. This is good indication that machine tools will either stay or strong or grow faster in the next year or so.
For more information on machine tool sales and leading indicators, go here.
With a reading of 54.9, the April MBI showed that the metalworking industry had grown at a fairly consistent rate since October 2011. In fact, April marked the 33rd month of growth, even though it was the first month of noticeably slower growth since October 2011.
Four of the six subindices lowered the industry’s growth rate. Most notably, new orders moved from 63.4 to 56.4 and production moved from 63.0 to 59.0. While the new order growth rate slipped below the average rate for this expansion, the production growth rate remained fairly strong. Because production grew faster than new orders, backlogs moved from strong growth to contraction in April. Supplier deliveries also contributed to the slower industry growth rate, but the change was not that great. Supplier deliveries still indicated widespread strength in the manufacturing supply chain.
Employment and exports were on the other end of the spectrum. Employment had grown for 12 consecutive months, but it did so at a faster rate in April. Exports still contracted, but they did so at a slower rate in April. This helped keep the industry’s growth rate up.
Future business expectations fell to their lowest level since November 2011. However, expectations were still notably above the level seen in the first half of 2011. While expectations came down a little, metalworking facilities continued to buy equipment at a significant rate. Average spending per plant trended up and reached its second highest level since June 2011.
With a reading of 57.0, the March MBI shows that the metalworking industry grew steadily faster in the first quarter of 2012. March’s index was the fastest rate of growth for the metalworking industry since September 2011.
The most significant contributors to the faster rate of growth were new orders, production and backlogs. The new order growth rate has increased sharply since December 2011, pushing the new orders index to its highest level since January 2011. The production index has also seen significant gains since the beginning of 2012. Production grew at its fastest rate since June 2011. As new order growth continued to outpace production growth, backlog growth increased.
Also contributing to the growth of the March MBI was the supplier deliveries index, which moved from 57.3 to 59.2. The lengthening supplier deliveries indicated strength throughout the manufacturing sector. The employment index grew for the 11th consecutive month, but at a slower rate than in February. Also, with the dollar gaining on other world currencies, the export index contracted for the fifth time in the previous six months.
Future business expectations remained strong. The index showed metalworking facilities were slightly more optimistic about their business than they were the previous month. This continued the trend of improving business expectations that began in October 2011. Finally, the average spending on metalworking equipment for the next 12 months has improved since September 2011. This indicates that machine tool sales should remain strong for at least the next quarter or two.
According to USMTO, machine tool orders in January 2012 were 1,771 units and $375,672,000. This was the 18th consecutive month of annual growth for unit and dollar sales. The January annual growth rate for units, 37.0 percent, was still faster than at any other time since the mid ‘70s except for September 2004 to January 2005.
While the annual growth rate was still one of the strongest in the industry’s history, it is clear that the growth was slowing. Unit sales were at their lowest level since February 2011. And, unit sales in January 2012 were 3.2 percent less than they were in January 2011—the first decrease since December 2009. However, unit sales in January were just below my forecast. So, this should not come as a surprise.
Two of the most important leading indicators for machine tool sales are exchange rates and industrial production. Against all currencies, the dollar continues to gain value against other world currencies (on a monthly basis). Generally, when the dollar gains in value, machine tool sales slow down. On an annual basis, the dollar continues to contract, which is good for machine tool sales, but it is doing so more slowly. However, consumer durable goods industrial production is still at a strong level. One-month rates of change are still significantly positive and annual rates of change grew faster each of the previous five months. When industrial production grows faster each month, machine tool sales are stronger. With these two leading indicators counteracting each other, machine tool sales may be relatively stable in 2012—at least, as stable as machine tool sales can be.
For more information on machine tool sales and leading indicators, go here.
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