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 U.S. Manufacturing Technology Orders (USMTO), machine tool sales in September were 3,452 units and $638,010,000 in real dollars. These numbers are absolutely astounding. Unit sales were the highest in the history of the USMTO program, which dates back to 1996. Further, unit sales were the highest since June 1986, which made September the single best month of unit sales in nearly 30 years. In those nearly 360 months, there have only been seven months when sales topped 3,000 units. Unit sales in September were 55.3 percent more than they were last September. That sent the annual rate of change, which had been floating around 0 percent for 2014, to 7.6 percent. Based on my forecast for the remainder of the year, unit sales should end 2014 up 5.7 percent compared to 2013.
In September my unit forecast was too low by 20.3 percent, which was by far my worst performance of any month in 2014. Year to date my forecast is too low by 3.0 percent. Based on my forecast and actual data, I think some sales were held from July and August and pushed into September because of IMTS.
Real dollar sales also were the second highest in the history of the USMTO program (March 1998 had $758 million of machine tool sales). Only three times in the history of the program have real dollar sales topped $600 million in a single month. Compared to last September, real dollar sales were up 60.1 percent. Sales in September moved the annual rate of change into positive territory for the first time since November 2012. Based on my forecast, real dollar sales will end the year up 7.0 percent.
With dollar sales increasing more than unit sales in September, the average price of a machine increased 3.1 percent compared to one year ago. That is the month-over-month increase in the average price of machine since January 2014. Annually, the average price of a machine has been contracting at a slower rate since May. This is historically a sign of an improving machine tool market in unit and dollar terms. One other interesting tidbit was the disparity in the average price of machines sold in September by region. In the Southeast, Northeast and North Central - West, the average price increased by at least 16.5 percent. However, in the West, South Central and North Central - West, the average declined by at least 5.3 percent and as much as 10.6 percent.
My four primary leading indicators for machine tool sales (money supply, durable goods capacity utilization, Gardner Business Index and durable goods production) are pointing to be a very strong year for the machine tool industry in 2015.
You can find more on machine tool sales and the leading indicators on our metalworking and monetary pages.
With a reading of 51.2, the Gardner Business Index showed that the metalworking industry grew for the 10th consecutive month and the 12th time in 13 months. October’s rate of expansion was slightly faster than last month. The month-over-month rate of growth was just 1.0 percent, which was the slowest rate of growth since August 2013. The annual rate of growth decelerated for the first time since it began growing in March.
Both new orders and production increased for the 13th month in a row. In both cases, the rate of expansion was significantly faster than the previous month. The accelerating contraction in backlogs took a pause in October as backlogs contracted at a slightly slower rate than they did in September. Compared to the same month one year ago, backlogs contracted for the first time since August 2013. While it was still growing quickly, the annual rate of growth has decelerated for two months in a row. This indicates that capacity utilization will likely see its peak rate of growth in the second quarter of 2015. Given the trend in backlogs, it is still likely that capacity utilization will average more than 80 percent in 2015. Employment continued to expand but the rate of hiring has slowed compared to the first half of the year. The rate of contraction in exports continued to accelerate as the dollar continues to appreciate against other world currencies. Supplier deliveries continued to lengthen but the rate of increase has slowed the last two months.
Material prices have increased at a slower rate since June. Material prices were increasing at a rate similar to the first four months of the year. Prices received have increased the last six months. This is the strongest period of sustained price increases by metalworking facilities since the summer of 2012. Future business expectations took their biggest hit since December 2012 and were at their lowest level since October 2013.
Plants with more than 100 employees continued to grow but they did so at their slowest rate of 2014. Facilities with 20-99 employees saw significantly better business conditions in October. Once again they were growing at a rate similar to that of the largest facilities. Shops with fewer than 20 employees contracted for the fifth month in a row and the eighth time in 2014.
For the fourth month in a row, the South Central region was the fastest growing region by a fairly wide margin. Its index has been above 60.0 two of the last three months. The North Central - East and Northeast regions also expanded. The North Central – West, West, and Southeast regions contracted after growing for a number of months.
Future capital spending plans contracted 13.5 percent compared to last October. This was the fastest month-over-month contraction since February 2014. The annual rate of growth decelerated to 4.2 percent, which was the first time it decelerated since it began growing in April.
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With a reading of 50.9, Gardner’s Metalworking Business Index showed that the industry grew in September for the ninth consecutive month and the 11th time in 12 months, although the rate of expansion was the slowest of 2014. While the index was still 5.8 percent higher than it was one year earlier, this was also the slowest rate of month-over-month growth since October 2013. The annual rate of growth in the metalworking industry continued to accelerate, however, at its fastest rate since March 2011.
Both new orders and production increased for the 12th month in a row, although in both cases, the rate of expansion was the slowest of the year. Backlogs have contracted noticeably faster since June. However, the month-over-month rate of change was still growing, and the annual rate of growth was at its fastest rate since March 2011. This indicates that capacity utilization should increase rapidly in the upcoming months. Given the trend in backlogs, it is likely that capacity utilization will average more than 80 percent in 2015. Employment expanded at its fastest rate since June, while exports remain mired in contraction. Supplier deliveries continued to lengthen in September but appeared to break the trend of increasing lengthening.
Material prices have increased at a slower rate since June, at a rate similar to the first four months of the year. Prices received have increased the previous five months, the strongest period of sustained price increases by metalworking facilities since the summer of 2012. Future business expectations improved in September, with the index reaching its highest level since June.
Future capital spending plans increased 4.3 percent compared to last September. This was the second month in a row of growth. The annual rate of growth accelerated to 6.1 percent, which was its second fastest rate since March 2013.
Go here for more economic news from Gardner Business Media.
With a reading of 52.3, the metalworking industry grew in August for the eighth consecutive month and the 10th time in 11 months. The rate of growth rebounded somewhat from July, which had the slowest rate of 2014. The month-over-month rate has been in double digits five of the last six months, and the annual rate of change has grown faster for six straight months and is at its fastest rate since April 2011.
Both new orders and production increased for the 11th month in a row, and both of their indices grew at a faster rate than in July. Backlogs have contracted for five consecutive months, although this rate slowed in August. Despite the contraction, the backlog index was 33.5 percent higher than it was one year earlier, the fastest rate of monthly growth since July 2010. This indicates that capacity utilization should increase rapidly in the upcoming months and likely will average more than 80 percent in 2015. While employment in metalworking continues to expand, the rate of growth in August was the slowest of 2014. Exports have contracted faster as the dollar has strengthened, and supplier deliveries have been lengthening at a steady rate since September 2013.
Material prices have increased relatively steadily and significantly since August 2013. Prices received increased the last four months, the strongest period of sustained price increases by metalworking facilities since summer 2012. Despite all the good news, future business expectations fell to their lowest level since September 2013.
After contracting in July, future capital spending plans increased 22.6 percent over last August, the fastest month-over-month growth since November 2013. The annual rate of growth accelerated to 6.0 percent, its second fastest rate of growth since March 2013.
Since two significantly down years after the financial collapse in the fall of 2008, machine tool consumption has been quite strong, performing at or above the historical average market. But 2015 looks to be the best post-recession year yet. According to the Gardner Research Capital Spending Survey and Forecast, metalcutting machine tool consumption will increase 37% next year. This dramatic jump in consumption comes after what is estimated to be a slightly down 2013 (-10%) and flat 2014.
Consumption of metalcutting equipment is expected to reach $8.8 billion in 2015. If the forecast proves true, then 2015 would be the strongest year for machine tool consumption since 1998, which had sales of $9.6 billion in real dollars. Moreover, next year could see the U.S. become the number one consumer of CNC machine tools for the first time since 2000.
While the general economy remains mired in slow growth, the four primary leading indicators for machine tool consumption are indicating significant growth for 2015. These leading indicators are:
Money Supply – Typically, changes in the money supply lead machine tool consumption by about two years. The money supply grew at an accelerating rate from February 2013 to June 2014. And, the rate of growth reached its second highest peak in history. This indicates a rapidly growing machine tool market throughout 2015.
Capacity Utilization – Perhaps the most important leading indicator, it usually leads machine tool consumption by 10 months. Durable goods capacity utilization was at 78.6% in July 2014. Based on the correlation with backlogs from the Gardner Business Index, capacity utilization should reach 80% in the next couple of months and remain there throughout 2015. This would be the first time durable goods capacity utilization was higher than 80% since June 2000.
Gardner Business Index – According to this diffusion index from Gardner Research, business conditions at metalworking facilities have improved every month but one since October 2013. Annually, the index has grown at an accelerating each of the last six months. While the index has only been around since 2006, it has shown a high correlation with machine tool consumption. The index leads the machine tool industry by about 10 months.
Durable Goods Production – Production is at an all-time high in the U.S. For 20 consecutive months, durable goods production has set a record high for that month. Production should grow at an accelerating rate through at least the end of the year. Production leads machine tool consumption by about 15 months.
For the last two years, metalworking facilities spent relatively more money on horizontal and/or larger machines. However, projections indicate that trend will reverse itself in 2015. The machine types with the largest increases in spending will likely be either vertical machines or smaller machines of all types. Horizontal machining centers will still be the most preferred machine type, but the level of spending will be fairly flat compared to 2014. Machine types forecast to grow significantly in 2015 include vertical machining centers, vertical lathes, small horizontal turning centers, small horizontal lathes, and certain types of grinding machines. Also, the survey appears to indicate a much greater interest in machines for additive manufacturing in 2015.
The top five industries buying machine tools in 2015 are projected to be job shops, machinery/equipment manufacturers, automotive, pumps/valves/plumbing products, and forming/fabricating (non-auto).
Roughly one-third of the spending will be at facilities with more than 250 employees. According to the Gardner Business Index, these larger metalworking facilities are growing at their fastest rate in nearly two years.
Unlike other capital spending projections, Gardner’s forecast is based on surveying end users about their specific spending intentions by machine type. The projection is then derived from statistical analysis of the end-user sample. The survey has historically been among the most accurate predictors of spending.
Stop by Gardner's booth (W-10) to learn more. Also, be sure to use the digital IMTS directory to help plan your booth visits.