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 48.3, the Metalworking Business Index showed that the metalworking industry has contracted for the first time in three years. The contraction could be due to seasonal effects since July is when many manufacturing facilities slow down or shut down for maintenance. Also, after three years of growth, one month of contraction compared to the previous month means that the metalworking industry is still operating at very high levels. However, since March 2012 there has been a steady decline in the growth of the metalworking industry.
Both the new orders and production subindices fell significantly in July, moving from growing to contracting. However, during the three-year expansionary period, both subindices have been at lower levels. Employment continues to expand, although it is growing at a slower rate. Backlogs are contracting at the fastest rate since the expansion began. With new orders contracting faster than production, the industry could see backlogs contract further. Exports continue to contract as the dollar strengthens against other currencies. The one bright spot is that supplier deliveries continue to lengthen. This indicates that manufacturing, in general, is still operating at a fairly lean level, especially with backlogs contracting so sharply.
The future business expectations subindex has fallen below its historical average, which means that owners/managers are less optimistic than usual. Certainly, the significant drop in backlogs has contributed to this. Also, the Supreme Court’s decision on healthcare was announced shortly before this survey. A similar reduction in optimism occurred last year during the government’s debt ceiling debate. Business owners and managers are more optimistic when conditions appear more stable.
According to USMTO, machine tool orders in May 2012 were 2,075 units and $408,053,000. This is second highest monthly unit sales in 2012, behind March. And, monthly unit sales have been above 2,000 units in 11 of the last 15 months. After contracting in March, unit sales have grown the last two months compared to the same month one year ago. However, the one-month rate of growth is much slower than it was in 2010 and 2011. The annual rate of change continues to grow but at a slower rate each month.
Two of the most important leading indicators for machine tool sales are exchange rates and industrial production. Against all currencies the one-month rate of change on the dollar has grown faster each of the last four months. This is the fastest rate of growth since July 2009. Also, the annual rate of change is growing for the first time since March 2010. When the dollar switches from contracting to growing against other world currencies, machine tool sales have begun contracting within the next two years. This is a limited data set though, as it has only happened four times in the last 40 years. However, the trend in industrial production is pointing to stronger machine tool sales in the future. The one-month rate of change has been above 11% four of the last five months. And, the annual rate of change has grown faster each of the last seven months. This is the strongest rate of growth since April 2011.
For more information on machine tool sales and leading indicators, go here.
With a reading of 51.2, the June Metalworking Business Index showed that the metalworking industry has grown for almost three years. However, the current rate of growth is the slowest it has been since this recovery in metalworking began in August 2009. June can be a slower month compared to others, but that is not always the case. Also, the industry has clearly seen slower growth each of the last three months.
The new order growth rate in June was the slowest it has been since August 2010, when new orders contracted. June’s production grew at one of its slowest rates during this expansionary period. However, production grew at a faster rate than new orders. This means that backlogs contracted for the third straight month. In fact, backlogs have contracted six of the last nine months.
Employment continues to grow at a strong pace. With the dollar gaining value relative to other currencies, exports have contracted or been flat since September 2011. While supplier deliveries are still lengthening, the rate of lengthening is the slowest since September 2011. Material prices are increasing but at the slowest rate since October 2010. However, prices received continue to grow at a consistent rate.
Although the index has reached its lowest level since May 2011, metalworking facilities remain optimistic about future business conditions and continue to show a strong interest in new equipment. Average spending per plant on capital equipment for the next 12 months has remained fairly consistent since October 2011. After nearly three years of strong growth, the industry is probably ready for a little bit of a slowdown. With the problems in Europe and the upcoming election, a little breather in the growth rate is probably likely.
The consumer durable goods industrial production index was 95.0 in May 2012. This was the fourth month in a row that the index had been at or above 95.0. The last time that happened was August-December of 2007. This was the fourth time in the previous five months that the one-month rate of change had been more than 10 percent. Also, the annual rate of change grew faster each of the previous seven months. Since consumer durable goods industrial production is the best leading indicator for machine tool sales, this is a very positive sign for future machine tool consumption.
A good leading indicator for consumer durable goods industrial production is consumer durable goods spending. Spending remained at a very high level. The one-month rate of change showed consistent growth. In April, the one-month rate of change was at its highest level since April 2011. However, the annual rate of growth slowed for eight consecutive 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 (more than many realize, I think), industrial production is growing faster even when the leading indicator says it should be slowing down—there is a 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 April 2012 were 2,066 units and $469,653,000. Unit sales have been above 2,000 machines 10 out of the last 14 months. While unit sales contracted in March compared to one year ago, unit sales in April were up 6.4 percent compared to April 2011. However, dollar sales contracted for the second month in a row compared to the same months a year ago. This means the average machine price contracted for the first time since November 2010 and the second time since October 2009. Typically, contracting prices occur before a contraction in unit sales. This is a confirming indicator that the machine tool market is indeed beginning to slow down.
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. The one-month rate of change is growing at the fastest rate since July 2009. Although the annual rate of change is still contracting, it is doing so more slowly. The same is true for the dollar compared to the major currencies of the world. 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 four months. The annual rate of change has grown has grown faster for six straight months. This is a good indication that machine tools will either stay strong or grow faster in the next year or so.
For more information on machine tool sales and leading indicators, go here.