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 49.9, Gardner’s metalworking business index (MBI) showed that conditions in the metalworking industry were unchanged from November. This comes after two months of modest growth. While the index was essentially flat in December 2013, it was 11.4 percent higher compared to December 2012. This was the fourth month in a row that the index was higher than it was one year ago, and it was the second consecutive month that the rate of growth was more than 10 percent. So, even though the index is not indicating strong growth, it is indicating that the industry has improved significantly compared to a year ago.
The most significant reason for the slight decline in the index was the slower growth in production. The production subindex recorded the largest change of the six subindices that are used to calculate the overall index. The most likely reason for the slower growth in production was the Christmas and New Year’s holidays fell during the middle of the week, which likely led plants to close for longer than normal. Otherwise, it would have been unlikely for production to slow with new orders continuing to grow faster. Backlogs continued to contract at a similar rate. However, the trend in backlogs indicates that capacity utilization should increase significantly in 2014. Employment growth slowed in December. Exports contracted at their slowest rate since April 2012. Supplier deliveries continued to lengthen at a decent pace, which indicates relatively good conditions throughout the supply chain.
Material prices have increased at a relatively constant rate since April 2013. Prices received were largely unchanged throughout 2013, but in December they increased at their fastest rate since February 2013. Future business expectations improved notably since August 2013, reaching their highest level since April 2012.
Plants with more than 50 employees grew for at least three months, depending on how large the facility is. Plants with fewer than 50 employees continued to contract. However, the rate of contraction at smaller facilities continued to slow down.
The West South Central region grew at the fastest rate in December. It grew faster the previous two months. New England grew at the next fastest rate, and it grew three of the previous four months. The South Atlantic region grew for three straight months while the Mountain region grew five of the last six months. The East North Central, West North Central, and Pacific contracted in December after growing in November. The Middle Atlantic and East South Central remained stuck in a prolonged contraction.
Future capital spending plans grew month-over-month for the fourth consecutive month. The annual rate of change grew faster the last two months, which is a very positive for capital equipment spending in 2014.
With a reading of 50.3, Gardner’s metalworking business index showed that the metalworking industry expanded for the second month in a row—the first time the industry has grown for two consecutive months since summer 2012. The index was 15.4 percent higher than it was in November 2012. This is its fastest month-over-month rate of change since July 2010, and it is third straight month of month-over-month growth.
Both new orders and production grew for the second month in a row, but production grew at a faster rate than new orders in each of the months. Backlogs continue to contract, but, compared to the same months one year ago, this index has increased three of the last four months. This is a strong indication that capacity utilization in the metalworking industry should increase in the early part of 2014. Employment expanded at a faster rate in October and November, and supplier deliveries continued to lengthen.
Material prices have increased at a relatively constant rate since April 2013, but prices received by metalworkers hardly increased at all in 2013. Future business expectations improved the previous three months, reaching their highest level in November since May 2012.
Mid-size facilities continued to grow at a similar rate to October. Plants with more than 250 employees saw their rate of growth pick up significantly, while plants with 20-49 employees were essentially flat, an improvement from the previous several months. The smallest shops continued to contract but at their second-slowest rate since May 2012.
Future capital spending plans were at their highest level since February 2013. In fact, November’s planned spending was 32.0 percent higher than a year earlier. Month over month, spending plans increased in the previous three months, and the annual rate of change grew in November for the first time in three months.
With a reading of 50.7, Gardner’s metalworking business index showed that the metalworking industry expanded for the first time since March 2013. The index was 9.0 percent higher than it was in October 2012 and it was the second straight month of month-over-month growth. And, it was the fastest rate of growth since June 2012.
New orders grew for the first time since March 2013 and at their fastest rate since May 2012. Similarly, production grew for the first time since May 2013 and at their fastest rate since May 2012. Backlogs continued to contract, but they did so at their slowest rate since February 2013. After two months of contraction, employment grew in October Exports continued to contract as the dollar remains relatively strong. Supplier deliveries continue to lengthen at similar rate to the last 12 months.
Material prices increased at a similar rate to most of 2013. Prices received barely increased in October, which is similar to the rest of 2013. Future business expectations shot up in October, reaching their highest level since May 2012.
Shops with more than 50 employees have been expanding throughout most of 2013 and that trend continued in October. Shops with fewer than 50 employees have contracted throughout 2013. However, the rate of contraction has moderated the last couple of months. Shops with fewer than 19 employees had an index of 49.2 in October compared to 40.2 in August.
While nine regions had contracted for three months, in October four regions expanded. The Mountain region had an index of 60.2. New England grew for the second month in a row. The South Atlantic and West North Central region moved to expansion from contraction. The East North Central, Middle Atlantic, and Pacific regions were just under 50. The East South Central continued to contract the fastest but it did see a significantly slower rate of contraction compared to August.
Future capital spending plans were up 6.3 percent compared to last October. This was the second month in a row that the month-over-month rate of change grew.
With a reading of 48.1, Gardner’s MBI showed that the metalworking industry contracted at a much slower rate in September. The index was 3.2 percent higher than it was in September 2012. This was the first time the month-over-month rate of change grew since April 2012.
While every subindex moved lower in August, in September each moved higher and contributed to the slower rate of contraction. New orders reached its second-highest level since March. Production barely contracted, reaching its highest level since May, and the backlog subindex was also near its highest level since March. Employment, exports and supplier deliveries also contributed positively to the overall index. Employment barely contracted for the second month, exports contracted at a slightly slower rate, and supplier deliveries lengthened for the third straight month.
Material prices increased at a constant rate in September. Prices received moved to modest growth from very modest contraction. Future business expectations also improved but are still at their second-lowest level of 2013.
One of the most important reasons for the slower contraction was the significantly higher index for facilities with fewer than 50 employees. These small shops have seen bad business conditions throughout 2013. While they still contracted in September, the index for small shops reached its second-highest level since March.
All nine regions had contracted for three months, however in September, New England grew and the Mountain region remained flat. The East North Central and Middle Atlantic saw minimal contractions. The West South Central contracted faster for the second month, and the East South Central remained the poorest-performing region with its second month in a row of an index below 40.
Future capital spending plans were up 3.0 percent compared to last September.
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.