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.
With a reading of 44.6, Gardner’s metalworking business index showed that the metalworking industry contracted at its fastest rate since November 2012. Since leveling off at the end of 2012 and beginning of 2013, the industry has generally contracted at an accelerating rate since March 2013.
Perhaps the most significant reason for the accelerated contraction in August was the decline in performance at facilities with more than 50 employees. These facilities had been growing throughout 2013. But, in August there was a noticeable drop in business activity. Shops with more than 250 employees contracted for the first time since December 2012. And, facilities with 50-99 employees contracted for just the second time in 2013. The smallest shops, those with fewer than 19 employees, saw their fastest rate of contraction since we expanded the survey in December 2011.
Every single sub-index moved lower in August. New orders and production dropped significantly, almost matching their fastest rates of contraction at the end of 2012. Backlogs have been contracting since March 2012. Employment contracted for the first time since November 2012. Exports contracted at their fastest rate since December 2012. Supplier deliveries were lengthening, but at a much slower rate.
Material prices continue to grow but the rate of growth has slowed from earlier in 2013. Prices received were just below 50 in August. This is the first time prices received have decreased since December 2012. Future business expectations fell to their lowest level in 2013.
All nine regions were below 50 in August. And, all nine regions had a lower index reading in August than they did in July. The best performing region was the West South Central and the worst performing region was the East South Central.
Future capital spending plans were the lowest since February 2012 and almost 25% below the historical average. Compared to one year ago, spending plans have contracted each of the last five months, but the rate of contraction has slowed each month. However, respondents to our capital spending survey, which you can read more about in the December issue, were very positive regarding their 2014 capital spending plans.
With a reading of 48.5, Gardner’s metalworking business index showed that the metalworking industry contracted at a much slower rate in July compared to June. While the industry has contracted every month but one since July 2012, the trend line of the index has been moving up since November 2012. The index is improving because better business conditions are spreading to smaller facilities.
Throughout 2013, I have highlighted that business conditions were split between large and small shops. Metalworking facilities with more than 50 employees have been growing while those with fewer than 50 employees have been contracting. In July, facilities with 20 to 49 employees began growing for the first time since March 2013 and only the second time since October 2012. These shops grew at their fastest rate since August 2012. Therefore, in July the index showed significant growth in all facilities with more than 20 employees. But, shops with fewer than 19 employees are still mired in contracting business conditions. In fact, business conditions at these small shops contracted at the second fastest rate since April 2012 when this cycle of contraction began.
Two of the sub-indices, employment and supplier deliveries, indicated expanding business conditions in July. Employment has been growing since December 2012 while supplier deliveries have been lengthening every month but one since at least December 2011. All of the other subindices that make up the metalworking business index continued to contract in July but all of them contracted at a slower rate, which is a positive sign. The index level for new orders, production, and backlog made a significant jump in July compared to June. The improvement in the index level for exports was more modest.
Material prices continue to grow faster and faster each month while prices received are growing at a relatively constant rate. However, the growth in materials prices is much faster than the growth rate for prices received, which puts pressure on profits. Future business expectations continue to move in a generally upward direction.
While all nine regions contracted in June, three regions expanded in July. The fastest growth was in the West South Central followed by the Mountain and West North Central. The West North Central has been the strongest region in 2013, growing in five of the last seven months. All other regions contracted with the poorest performance in the Middle Atlantic. This region has been the poorest performing region throughout 2013.
Future capital spending plans remained relatively modest. Compared to one year ago, spending plans have contracted each of the last four months, but the rate of contraction has slowed each month.
With a reading of 45.8, Gardner’s metalworking business index showed that the metalworking industry contracted at a faster rate in June. The industry contracted at its fastest rate in June since December 2012. The metalworking industry has contracted for 11 of the last 12 months.
Last month I mentioned that shops with fewer than 50 employees were contracting while shops with more than 50 employees were expanding. In June, only shops with more than 250 employees grew. Facilities with 50-249 employees moved from expansion to contraction while shops with fewer than 50 employees contracted faster.
New orders contracted for the third consecutive, contracting at the fastest rate since December 2012. Production contracted for the first time in 2013. Because production has remained stronger than new orders, backlogs contracted at their third fastest rate since March 2012. Employment grew for the seventh straight month, although the rate of growth has slowed. Exports continue to contract because of the relatively stronger dollar. Supplier deliveries shortened for the first time March 2010. The combination of all these subindices seems to indicate that there is some excess capacity in the metalworking industry. I think this explains why job shops and small shops are performing relatively worse than OEMs and large shops.
Material prices increased at a slightly faster rate while prices received increased at a slightly slower rate. Future business expectations declined slightly in June but have been fairly constant in 2013, which is about the level from the summer of 2012. Expectations are below the historical average.
In June, all nine regions contracted. The South Atlantic and West South Central regions contracted the slowest while the East South Central and Middle Atlantic contracted the fastest.
Future capital spending plans improved somewhat in June. They were at their fourth highest level since July 2012.
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With a reading of 48.5, the MBI showed that the metalworking industry contracted slightly in April after growing in March. Since the noticeable contraction in the second half of 2012, the industry has been virtually flat.
The real story through the first four months of 2013 is the diverging performance across plant sizes. Facilities with more than 50 employees have grown in every month. Those with fewer than 50 employees have continued to contract, however, and facilities with fewer than 19 employees continue to contract at the same rate they did in the second half of 2012. Primarily, it is small job shops that pulled the index back below 50.0 in April. Shops dedicated to specific industries are showing much better performance in the first four months of this year.
New orders contracted for the first time since December 2012, and this was the most significant reason the index moved below 50.0. Production, however, continued to grow, albeit at a slower rate than in March. These subindices contributed to the faster contraction in backlogs, but there is likely also some over-capacity in the metalworking industry. This would further explain why backlogs have contracted since April 2012 and why smaller job shops are performing worse than shops dedicated to specific industries. Employment continued to grow in April, while exports continued to contract. Supplier deliveries continued to lengthen, but at almost the slowest rate since August 2011.
Material prices are still growing, but at a much slower rate than the previous two months. Prices received were virtually flat. The combination of these two trends, contracting new orders and growing employment continues to put pressure on profits at metalworking facilities. Future business expectations dropped in April, but they are still above almost every month since July 2012.
With a reading of 50.5, Gardner’s metalworking business index showed that business activity in the metalworking industry increased for the first time since June 2012. Basically, the contraction lasted just six months and was most likely due to the election and fiscal cliff. Now that those issues are finished or on the back burner, the metalworking industry is recovering.
New orders have grown consistently for three months. At the same time, production has grown faster each month. With new orders falling from a slightly higher level to a slightly lower level than production, it seems that there is still adequate capacity at metalworking facilities. This is the likely reason for backlogs continuing to contract, although the rate of contraction has slowed. The relatively weaker recovery in backlogs is the most significant reason why the overall index does not show even stronger growth. In addition to the drag from backlogs, exports are holding the industry back from faster growth. While exports have been contracting more slowly, the recent problems in Europe and the increased quantitative easing in Japan will likely keep the dollar relatively strong. This means exports will remain a drag on the metalworking industry. Supplier deliveries have been slowly lengthening, indicating that the durable goods supply chain is improving. Also, employment has started growing faster again.
Materials prices slowed their rate of growth in March, but there is still a strong upward trend in the rate of growth in prices since July 2012. At the same time, prices received have been contracting or growing slowly. The combination of these two trends and the accelerating growth in employment is putting pressure on profits at metalworking facilities. Future business expectations continue to improve rapidly and are now just above the historical average.
Shops with 50 or more employees have been growing for three months. In March, shops with 20-49 employees started growing as well. But, shops with 19 or fewer employees are still contracting. The rate of contraction in these shops has been fairly constant the last three months. Regions with the strongest growth (in order) are the West North Central, Pacific, New England, South Atlantic, and West South Central. The other four regions contracted mildly in March. End markets showing strong growth in March were aerospace; electronics; industrial motors, hydraulics, and mechanical components; and pumps, valves, and plumbing products.