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.
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.
With a reading of 52.8, the May MBI showed that the metalworking industry continued to grow. However, the rate of growth was the second slowest since August 2009. Because the industry really hasn’t seen slower growth than this in the last 34 months, the next month or two will provide a good indication of where the industry is headed for the next six to 12 months.
In May, every single subindex either grew slower, improved less or contracted at a faster rate. This is a fairly good indication that there was a broad-based slowing in the growth of metalworking. While the slowdown touched all areas of the metalworking industry, new orders were virtually unchanged. Continued strong growth in new orders is a sign that this recent slowdown in the rate of growth will be short lived.
Production saw slower growth for the second straight month. But, production levels are still quite strong. Strong production levels led to faster contraction in backlogs. Even though backlogs contracted the last two months, metalworking facilities continue to hire new personnel at a good clip. Supplier deliveries continue to lengthen, which indicates strength throughout manufacturing. But, deliveries are lengthening at a slower rate.
The dollar has been gaining ground against world currencies, especially the Euro, in recent months. The relative movement in the dollar is a likely cause of exports contracting faster each of the last three months. Future business expectations are still strong. The index value is still above the long-term average. However, May was the lowest reading for future business expectations since June 2011. Finally, metalworking facilities are indicating that their rate of spending on capital equipment for the next 12 months will remain fairly similar to the amount spent in the last quarter or two.
The consumer durable goods industrial production index was 94.9 in April 2012. This is the index’s third highest value since February 2008. The only two months higher in value were February and March of this year. April industrial production was 13.3 percent higher than the production level in April 2011. This is the fastest growth rate since June 2010. Three of the last four months, the one-month rate of change has been above 10 percent. This is pushing the annual rate of change to grow faster as well—it has done so each of the last six months.
This means that machine shops are seeing really good business at the moment. And, it is why capital equipment and tooling continue to be in high demand.
A good leading indicator for consumer durable goods industrial production is consumer durable goods spending. Spending is at the highest level it has ever been. The one-month rate of change shows consistent growth, but the annual rate of change has shown slower growth each of the last seven 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, industrial production is growing faster even when the leading indicator says it should be slowing down (there is 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 March 2012 were 2,304 units and $458,506,000. This is the fourth strongest month for machine tool unit sales since September 2008. However, this is the first month since the recovery began that unit sales were less than the same month one year ago. But, the one-month rate of change in unit sales for March 2012 was just slightly negative, at -5.4 percent. This isn’t a surprise though, at least to me. My forecast for machine tool unit sales in March was 2,300. The annual growth rate for unit sales is still reasonably strong at 25.7 percent, but that rate has now slowed for 10 consecutive months.
Two of the most important leading indicators for machine tool sales are exchange rates and industrial production. Against all currencies, the dollar has gained value in each of the last five months, and against the major currencies, the dollar has gained value in each of the last four months. Even though the annual rate of change for both is still negative, 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 three months. The annual rate of change has grown has grown faster for five straight months. This is good indication that machine tools will either stay or strong or grow faster in the next year or so.
For more information on machine tool sales and leading indicators, go here.
With a reading of 54.9, the April MBI showed that the metalworking industry had grown at a fairly consistent rate since October 2011. In fact, April marked the 33rd month of growth, even though it was the first month of noticeably slower growth since October 2011.
Four of the six subindices lowered the industry’s growth rate. Most notably, new orders moved from 63.4 to 56.4 and production moved from 63.0 to 59.0. While the new order growth rate slipped below the average rate for this expansion, the production growth rate remained fairly strong. Because production grew faster than new orders, backlogs moved from strong growth to contraction in April. Supplier deliveries also contributed to the slower industry growth rate, but the change was not that great. Supplier deliveries still indicated widespread strength in the manufacturing supply chain.
Employment and exports were on the other end of the spectrum. Employment had grown for 12 consecutive months, but it did so at a faster rate in April. Exports still contracted, but they did so at a slower rate in April. This helped keep the industry’s growth rate up.
Future business expectations fell to their lowest level since November 2011. However, expectations were still notably above the level seen in the first half of 2011. While expectations came down a little, metalworking facilities continued to buy equipment at a significant rate. Average spending per plant trended up and reached its second highest level since June 2011.