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.
Since two significantly down years after the financial collapse in the fall of 2008, machine tool consumption has been quite strong, performing at or above the historical average market. But 2015 looks to be the best post-recession year yet. According to the Gardner Research Capital Spending Survey and Forecast, metalcutting machine tool consumption will increase 37% next year. This dramatic jump in consumption comes after what is estimated to be a slightly down 2013 (-10%) and flat 2014.
Consumption of metalcutting equipment is expected to reach $8.8 billion in 2015. If the forecast proves true, then 2015 would be the strongest year for machine tool consumption since 1998, which had sales of $9.6 billion in real dollars. Moreover, next year could see the U.S. become the number one consumer of CNC machine tools for the first time since 2000.
While the general economy remains mired in slow growth, the four primary leading indicators for machine tool consumption are indicating significant growth for 2015. These leading indicators are:
Money Supply – Typically, changes in the money supply lead machine tool consumption by about two years. The money supply grew at an accelerating rate from February 2013 to June 2014. And, the rate of growth reached its second highest peak in history. This indicates a rapidly growing machine tool market throughout 2015.
Capacity Utilization – Perhaps the most important leading indicator, it usually leads machine tool consumption by 10 months. Durable goods capacity utilization was at 78.6% in July 2014. Based on the correlation with backlogs from the Gardner Business Index, capacity utilization should reach 80% in the next couple of months and remain there throughout 2015. This would be the first time durable goods capacity utilization was higher than 80% since June 2000.
Gardner Business Index – According to this diffusion index from Gardner Research, business conditions at metalworking facilities have improved every month but one since October 2013. Annually, the index has grown at an accelerating each of the last six months. While the index has only been around since 2006, it has shown a high correlation with machine tool consumption. The index leads the machine tool industry by about 10 months.
Durable Goods Production – Production is at an all-time high in the U.S. For 20 consecutive months, durable goods production has set a record high for that month. Production should grow at an accelerating rate through at least the end of the year. Production leads machine tool consumption by about 15 months.
For the last two years, metalworking facilities spent relatively more money on horizontal and/or larger machines. However, projections indicate that trend will reverse itself in 2015. The machine types with the largest increases in spending will likely be either vertical machines or smaller machines of all types. Horizontal machining centers will still be the most preferred machine type, but the level of spending will be fairly flat compared to 2014. Machine types forecast to grow significantly in 2015 include vertical machining centers, vertical lathes, small horizontal turning centers, small horizontal lathes, and certain types of grinding machines. Also, the survey appears to indicate a much greater interest in machines for additive manufacturing in 2015.
The top five industries buying machine tools in 2015 are projected to be job shops, machinery/equipment manufacturers, automotive, pumps/valves/plumbing products, and forming/fabricating (non-auto).
Roughly one-third of the spending will be at facilities with more than 250 employees. According to the Gardner Business Index, these larger metalworking facilities are growing at their fastest rate in nearly two years.
Unlike other capital spending projections, Gardner’s forecast is based on surveying end users about their specific spending intentions by machine type. The projection is then derived from statistical analysis of the end-user sample. The survey has historically been among the most accurate predictors of spending.
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With a reading of 51.9, the July metalworking index showed that the industry grew for the seventh consecutive month and the ninth time in 10 months. While this growth was at its slowest pace of 2014, the index was still 7.0 percent higher than it was one year earlier, the 11th straight month that the month-over-month rate has grown. As a result, the annual rate of change has grown at an accelerating rate for five straight months and is growing at its fastest rate since April 2011.
Both new orders and production increased for the 10th month in a row, but their rates of growth have decelerated steadily since March. Backlogs have contracted for four consecutive months, and this rate accelerated in July, taking the backlog index to its lowest level since December 2013. This index is still significantly higher than it was one year ago, however, which is a positive sign for future capacity utilization and capital equipment investment. The rate of hiring had been accelerating since August 2013, but while employment is still growing, the accelerating growth trend was broken in July. Exports continued to contract but at a slower rate than they did in 2013. Supplier deliveries continued to lengthen at a slightly accelerating rate as they have done since June 2013.
Over the last three months, material prices have increased more than at any time since the first quarter of 2013. Over that same period, prices received by metalworkers have also increased at virtually their fastest rate since the summer of 2012. Future business expectations remain above average, but they have been trending down slightly throughout 2014.
Future capital spending plans fell to their lowest level since September 2011. This level was 12.2 percent lower than it was one year ago, which is the first month of contraction since February. The annual rate of change is still growing, but it did decelerate from last month.
With a reading of 53.6, the June metalworking index showed that the industry continues to grow at a strong rate. The index was higher than 53.0 every month in the first six months of 2014, and the industry grew eight of the last nine months. The June index also was 17.0 percent higher than it was one year earlier. For the fourth month in a row, it grew by more than 10 percent, which was the fastest rate of growth since July 2010. Annually, the industry has grown at an accelerating rate the last four months and is growing at its fastest rate since April 2011.
Both new orders and production increased for the ninth month in a row, however these rates of increase have decelerated since March. Backlogs contracted at a very moderate rate for the third month in a row, but they are expanding at a rapid rate compared to one year earlier. The annual rate of change in backlogs continues to accelerate, which is a positive sign for future capacity utilization levels and capital spending. Employment has expanded since last October, and in June grew at its fastest rate since September 2011. Exports contracted for the third straight month, and supplier deliveries continued to lengthen at a slightly increased rate, as they have since June 2013.
Material prices have increased at a faster rate this year and are at their fastest rate of growth since March 2012. Prices received by the metalworking industry increased for the second month in a row, and while future business expectations remain near the peak levels of this expansionary cycle, they have dipped slightly since February.
Future capital spending plans reached their second highest level of 2014 and have grown month-over-month for four straight months. In June, future spending plans increased 13.1 percent compared to one year earlier. Annually, future spending plans are growing at a rate of 4.0 percent, the fastest rate of growth this year.
With a reading of 53.7, Gardner Business Media’s May metalworking index showed that the industry continues to grow at a fast pace. The index was higher than 53.0 in each of the first five months of 2014, and the industry grew seven of the last eight months. The May index also was 10 percent higher than it was one year earlier, the third month in a row that it grew by at least that much. Annually, the industry has grown at an accelerating rate the last three months.
New orders increased for the eighth month in a row. During this time, the rate of increase in new orders has steadily accelerated. Production also has expanded for eight months; however, its rate of growth slowed somewhat in April and May. Backlogs contracted at a very moderate rate for the second month in a row, but compared to one year earlier, they are increasing at a rapid rate. The annual rate of change in backlogs continues to accelerate, which is a positive sign for future capacity utilization levels and capital spending. Employment has expanded since last October, in May growing at its fastest rate since June 2012. Exports contracted for the second straight month, while supplier deliveries continued to lengthen at a rate similar to that seen since last November.
Material prices have been increasing at their fastest rate since February 2013. After contracting in April, prices received by metalworkers increased in May at the second fastest rate since January 2013. Future business expectations improved in the month, almost reaching their highest level since early 2012.
Future capital spending plans have increased the last three months compared to one year earlier. In May, future spending plans increased 10.4 percent, the second month in a row of more than 10.0 percent growth. The annual rate of change accelerated for the second month in a row, reaching its fastest rate of growth since January.
With a reading of 53.6, Gardner’s April metalworking business index showed that the metalworking industry continues to grow at a fast pace. In each of the first four months of this year, the index has been above 53.0, and the industry grew six of the last seven months. The metalworking industry is still on the uptrend that began in August. In April, the index was 10.5 percent higher than it was one year earlier, the second month in a row that it grew by more than 10 percent. Annually, the industry has grown at an accelerating rate the last two months.
New orders increased for the seventh month in a row, at a steadily accelerating rate. Production also has expanded for seven months, and in recent months it has increased slightly faster than new orders. Therefore, backlogs contracted two out of the previous three months. Yet, compared to one year earlier, backlogs are increasing at a rapid rate. The annual rate of change in backlogs continues to accelerate, which is a positive sign for future capacity utilization levels and capital spending. Employment has expanded since October, but the rate of hiring slowed slightly in April. Exports began to contract once again, while supplier deliveries continued to lengthen at a rate similar to what we have seen since November.
Material prices have increased at a noticeably faster rate in 2014 compared to 2013. However, prices received contracted in April for the first time since August. Future business expectations remain strong even though they have fallen from their high level in the first three months of the year.
After contracting for two months, future capital spending plans increased in March and then again in April, when they were 17.9 percent higher than a year earlier. That is the strongest month-over-month rate of change since November, and it moved the annual rate of change back into positive territory.