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 July 2012 were 1,849 units and $374,323,000. July broke the string of five consecutive months of more than 2,000 units ordered. Also, July 2012 orders were 1.5 percent lower than orders in July 2011. This is just the second time since December 2009 that month over month orders contracted. Compared to the same month one year ago, dollar sales contracted more significantly than unit sales. Also, dollar sales have contracted three of the last five months. Therefore, the annual rates of change for units and dollars are much closer than they have been since late 2010. One reason that unit sales are holding up better than dollar sales is that the U.S. machine tool market is perhaps the strongest in the world at the moment (and this looks to continue to be the case in 2013). The U.S. market is forecast to see continued growth in 2013 while most other markets around the world will see much slower growth or contraction. So, builders are competing harder for sales in the U.S., which is taking away some pricing power from machine tool builders.
The annual rate of change for machine tool sales continues to grow more slowly. This is expected and the trend should continue until early 2013, according to our forecast. Based on Gardner’s Capital Spending Survey, spending on machine tools should remain strong in 2013, increasing 8-15 percent. According to the survey, current capacity utilization is 80.1 percent which is the highest since 1999. Also, capacity utilization has increased significantly since 2009 when it was just 61 percent. The historically high level and rapid rate of growth in capacity utilization will keep machine tool sales strong throughout 2013. Also, industrial production continues to grow at an accelerating rate, which is another sign that machine tool sales should be strong in 2013. While the dollar continues to gain against other currencies, which points to slower machine tool sales, the recent announcement of more QE by the Federal Reserve should help bring the value of the dollar down relative to other currencies. This could provide further support to machine tool sales in 2013.
With a reading of 49.5, the August Metalworking Business Index showed that the metalworking industry contracted for the second month in a row, but the two months of contraction were extremely shallow. The index works by comparing the current month’s activity to previous month’s activity, so August’s index is saying that overall, the metalworking industry is performing at a level just below the peak activity of this cycle. Also, the graphs for the overall index and subindices had been declining for five or six months. However, the downward trend line in each graph appears to have broken in August. We will need to see a couple more months of data before that call can be made definitively.
All but one subindex had a positive percent change in August. New orders continued to contract, but did so more slowly. Production increased in August, but new orders will need to start growing again for this to continue. Backlogs contracted more slowly. New orders will need to grow or production needs to slow for this to be a continuing phenomenon. Employment continues to increase in the metalworking industry. Supplier deliveries are still lengthening, indicating strength throughout manufacturing, but they are lengthening more slowly.
While future business expectations have been muted (with the passing of health care reform and the presidential election probably playing a significant role), expectations improved in August. Future expectations still are slightly below average since the inception of the MBI, but they are back above the previous lows in this expansionary cycle. Planned capital spending over the next 12 months has remained relatively flat. This could be an indication that businesses are not concerned enough about the future to alter their investment plans.
The consumer durable goods industrial production index was 84.8 in July 2012. This is the lowest level for the index since December 2011, but July is a seasonally low month for manufacturing output. Compared to July 2011, industrial production grew 8.7%. This is a strong rate of growth but is the lowest month-over-month growth rate since December 2011. Despite the slower rate of growth in July, the annual rate of change continued its rapid acceleration. The annual rate of growth is now 8.7%, which is the fastest rate of annual growth since March 2011. Also, this marks the ninth consecutive month of growth for consumer durable goods industrial production. Since consumer durable goods industrial production is the best leading indicator for machine tool sales, this is a very positive sign for future machine tool consumption.
A good leading indicator for consumer durable goods industrial production is consumer durable goods spending. Spending levels remain near all-time highs. The month-over-month rate of change in spending in June was 8.2%, which is the fastest since February 2011. Also, the annual rate of growth in spending has accelerated each of the last two months. This indicates that consumer durable goods industrial production should continue to grow faster.
To see more information on industrial production and its leading indicators go here.
According to USMTO, machine tool orders in June 2012 were 2,045 units and $418,507,000. This is the fifth consecutive month that machine tool sales were more than 2,000 units. The last time there was a streak longer than five months of more than 2,000 units sold per month was in the second half of 1998. That streak lasted from August 1996 to November 1998. During that incredibly strong run of machine tool sales from 1996 to 1998, the inflation-adjusted average price of a machine was $162,280. If we compare that average price to the one from the current run of strong sales (which I lengthened to the last 11 months, since 10 of those months have had sales of more than 2,000 units), then we find that the inflation-adjusted average price of a machine is $198,900, or 22.6% higher. So, not only are we seeing a high number of machines being sold, but each machine sold is worth significantly more. This is probably due to a number of factors, including demand outpacing supply and the advanced technology of machines today compared to machines of 15 years ago. Because machines are so much more productive today, spending an additional $36,000 doesn’t seem like that much when compared to the cost of hiring an additional employee today.
The annual rate of change for machine tool sales continues to grow more slowly. This is not unexpected at this point in the cycle. However, the two most important leading indicators for machine tool sales are pointing in different directions. Industrial production has grown at a rate of more than 11% five of the last six months, which is a very strong rate of growth historically. The annual rate of change has grown faster each of the eight months. This is very positive for machine tool sales and indicates that we should see growth in machine tool sales accelerate again sometime between October 2012 and April 2013, if past trends prove to be accurate. On the other hand, exchange rates are pointing to continued slower growth and contraction in machine tool sales. The dollar against both major currencies and all world currencies is growing faster. Typically, as the dollar gains strength machine tool sales slow. However, one of the major themes in the metalworking industry is re-shoring, which might help counteract the strengthening dollar.
With a reading of 48.3, the Metalworking Business Index showed that the metalworking industry has contracted for the first time in three years. The contraction could be due to seasonal effects since July is when many manufacturing facilities slow down or shut down for maintenance. Also, after three years of growth, one month of contraction compared to the previous month means that the metalworking industry is still operating at very high levels. However, since March 2012 there has been a steady decline in the growth of the metalworking industry.
Both the new orders and production subindices fell significantly in July, moving from growing to contracting. However, during the three-year expansionary period, both subindices have been at lower levels. Employment continues to expand, although it is growing at a slower rate. Backlogs are contracting at the fastest rate since the expansion began. With new orders contracting faster than production, the industry could see backlogs contract further. Exports continue to contract as the dollar strengthens against other currencies. The one bright spot is that supplier deliveries continue to lengthen. This indicates that manufacturing, in general, is still operating at a fairly lean level, especially with backlogs contracting so sharply.
The future business expectations subindex has fallen below its historical average, which means that owners/managers are less optimistic than usual. Certainly, the significant drop in backlogs has contributed to this. Also, the Supreme Court’s decision on healthcare was announced shortly before this survey. A similar reduction in optimism occurred last year during the government’s debt ceiling debate. Business owners and managers are more optimistic when conditions appear more stable.