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 48.5, 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.
With a reading of 49.6, Gardner’s metalworking index showed that business activity in the metalworking industry was virtually flat in February 2013 compared to January 2013. The contraction that started in July 2012 has ended relatively quickly in the last two months.
New orders and production have grown the last two months, which is a positive sign for future growth in metalworking. The rate of growth in new orders slowed slightly while the rate of growth in production accelerated. Despite the faster growth in new orders relative to production, backlogs continue to contract. The rate of contraction in backlogs has slowed noticeably, but the backlogs subindex is a significant reason why the metalworking index remains just below 50. Also weighing down the metalworking index are exports. The dollar was appreciating for much of 2012 and exports have contracted the last 15 months as a result. This trend could reverse in 2013 with increased quantitative easing from the Federal Reserve. After two months of very mild contraction around the election, the employment subindex has grown moderately the last three months.
While increased quantitative easing could help exports, it is hurting manufacturers by causing higher materials prices. Material prices are increasing at their fastest rate since March 2012. Prices received have increased the last two months, but at a much slower rate than material prices. The combination of growing employment and rapidly increasing material prices is putting pressure on profits of metalworking facilities.
While the overall index remains in a mild contraction, performance has been split based on shop size. Facilities with more than employees have grown for at least the last two months. However, shops with fewer than 50 employees continue to contract. While the rate of contraction in smaller facilities has slowed compared to the second half of 2012, it was greater in February than January. Unlike last month, more regions are growing than contracting. The fastest growth is in the South Atlantic while the fastest contraction is in the East North Central.
Two end markets that continue to experience growth are forming and fabricating (non-auto) and pumps, valves, and plumbing products.
With a reading of 49.7, the MBI showed that business activity in the metalworking industry was virtually flat in January 2013 compared with December 2012, but the industry clearly has broken out of the downward trend it began last March. Every subindex contributed to the improvement in the overall index in January.
New orders made the biggest jump, moving to 52.6 from 41.9. Production nearly matched the improvement in new orders, increasing to 50.4 from 42.3. This is the first time these subindices have grown since June and August, respectively. Despite the growth in new orders, backlogs contracted for the 10th month, but this contraction was noticeably slower. Exports continue to contract as the dollar remains relatively strong compared with most world currencies. After two months of contraction, employment in the metalworking industry has grown the last two months. Supplier deliveries continued to lengthen at the same rate, indicating widespread strength in manufacturing industries.
While the overall index has contracted for seven months, performance has been split based on shop size. Facilities with fewer than 50 employees have been contracting for some time, while facilities with more than 50 employees have begun growing. The period of contraction has been the longest for facilities with fewer than 19 employees. Most regions of the country are still contracting, but the East North Central and the West North Central both started growing in January.
While the metalworking industry as a whole is still contracting, there are end markets that are growing, including aerospace (56.1); automotive (52.5); construction machinery (55.3); electronics (50.3); forming and fabricating (53.4), and pumps, valves and plumbing products (54.8).
With a reading of 46.5, the October Metalworking Business Index showed that the metalworking industry contracted for the fourth month in a row. However, while the rate of contraction remained unchanged from September, it appears there was a slight change in the trend in the industry, based on the graphs of the overall index and the subindices.
Growth had been decelerating at a consistent rate for most of 2012, but the rate of contraction has not been accelerating as fast as that rate of growth was decelerating. This is a subtle shift, but could indicate the beginning of a bottom to this low point of the cycle. I’m writing this on Election Day, so the election results haven’t been factored into the results of the survey yet. I think we will see improvement in the index, regardless of who won.
New orders contracted for the fourth month in a row, but at a slower rate than in September. Production contracted for the third time in the last four months and the rate was faster than in September. Employment contracted for this first time since April 2011. Backlogs continue to contract at a significant rate as new orders have been contracting more than production. Supplier deliveries are still lengthening, but the index is the lowest it has been since August 2011. This indicates that the slowdown is fairly widespread throughout manufacturing. While material prices are still increasing, albeit more slowly, prices received by shops contracted for the second month in a row.
Perhaps the brightest part of the survey was that the future business expectations index improved in October. While this subindex is still near its low since mid-2009, it does appear to be bottoming out. During the last two upturns in metalworking, the future business expectations rebounded before most other subindices.