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 49.6, 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.
With a reading of 46.6, September’s Metalworking Business Index showed that the metalworking industry has contracted for the third month in a row. The August MBI provided an indication that the industry would break out of its slowing trend, which began in March 2012. However, the results of the September MBI indicate that the slowing trend continues. With some key leading indicators for metalworking still strong, the question is: How far and for how long will the industry contract? Is this a temporary slowdown while the industry waits to see what happens in the election, or is it linked to a world economy that is already slowing at a more significant rate?
Five of the six subindices used to compute the MBI had a negative impact on the reading in September. The new orders index showed faster contraction in September, reaching its lowest level since July 2009. After moving from contraction to expansion in August, the production index moved back into contraction in September. New orders have been contracting faster than production and this has put pressure on backlogs. The backlog index has contracted for six consecutive months and is at its lowest level since July 2009. Employment continues to expand as it has for 17 straight months. Reports from IMTS indicate that virtually every company affiliated with the metalworking industry is still looking to hire more people. Supplier deliveries was the only subindex to make a positive contribution to the September MBI. Delivery times lengthened more during the month.
Future business expectations continue to move lower, reaching their lowest level since July 2009. Also, future business expectations have been below average for the last three months.
The consumer durable goods industrial production index was 93.4 in August 2012. This is about the average level of the production index in 2012. The annual rate of change is growing at the fastest rate since February 2011. Since January 1970, the annual rate of change has grown faster than August 2012 slightly less than 10 percent of the time. Durable goods manufacturing is in a very strong period of growth. However, compared to August 2011, industrial production was 5.7 percent higher in August 2012. This is the slowest rate of growth month over month since November 2011. It is likely that the annual rate of change will peak during the fourth quarter of 2012. Consumer durable goods industrial production leads capital equipment spending by 12-18 months. Therefore, we should see continued growth in capital equipment spending throughout 2013.
A good leading indicator for consumer durable goods industrial production is consumer durable goods spending. Spending levels remain at all-time highs. The month-over-month rate of change in spending in July was 8.0 percent, which is well above the average rate of growth. Also, the annual rate of growth in spending has accelerated the last three months. This indicates that consumer durable goods industrial production should continue to remain at a high level.
To see more information on industrial production and its leading indicators go here.