The 2016 Capital Spending Survey
The machine tool market bottomed in the summer of 2016, but will continue to rebound in 2017 as shops invest in technology for unattended operation.
It’s a bit of a paradox. Orders for durable goods keep going down, yet signs show that sales of machine tools to make those goods are likely to go up next year.
Before we jump into the numbers behind this forecast, here’s how we arrived at where those numbers come from. Each summer, Gardner Business Intelligence (GBI) surveys readers of Modern Machine Shop and three of its sister publications about their plans for spending on metalworking capital equipment, workholding and tooling in the following year. Responses to these surveys are used to forecast spending by industry on specific machine tool, workholding and tooling types. They form the basis of our annual Capital Spending Survey.
Now the numbers: Having peaked at $7.5 billion in 2014, machine tool consumption contracted 3 percent in 2015 and 7 percent in 2016. Based on the 2017 Capital Spending Survey, projected total machine tool consumption in 2017 will be down an additional 1 percent. However, a deeper look at the survey results shows that demand for core machine tools (the types providing the most commonly applied processes) will increase in 2017 by 9 percent. In addition, GBI’s new econometric model for machine tool unit orders indicates that the rate of contraction in overall machine tool demand bottomed in July 2016 and will improve through the end of 2017.
New orders for durable goods have contracted since the summer of 2015, although there were signs of improvement in the summer of 2016. (Durable goods are products such as aircraft engines, automobiles and equipment that have an extended useful life for the buyer. Both the making and the buying of these products tend to ramp up and down at a pace that mimics significant economic trends, so economists watch these figures closely.) When durable goods production seemed to have peaked in the summer of 2015, it did so at near record levels. The fact is, the industry’s capacity to produce durable goods has been utilized to a lesser and lesser degree. This “capacity utilization” has slowly, but steadily declined since early 2015.
So, what’s driving the forecasted rebound in capital equipment spending at metalworking facilities? In short, it’s a need for increased productivity. Shops need to increase productivity in order to remain competitive in a global manufacturing marketplace and to counteract the much-talked-about skills gap. More and more shops are turning to lights-out and/or unattended machining to achieve this increase in productivity, but new equipment, including machine tools, workholding and automation, is needed to run lights-out.
According to the 2017 survey, buying a machine that can increase productivity is clearly the No. 1 motivation for buying a new machine tool (see Figure 1). While this was the first year “increase productivity” was a possible answer, the survey has asked about motivational factors for the last 30 years. Although several of the factors that motivate machine buying have declined in importance over time, one factor in particular—the availability of “new models”—has remained fairly steady since 2006. This observation fits with the motivation to increase productivity, because there are basically only two ways to do that: improve the capability of either the capital equipment or the human labor.
The labor option is less attractive right now because workers with the appropriate skills and habits are difficult to find and, if found, command wage/benefit packages that are costly. More important, worker productivity has a relatively modest potential for improvement, in any case. These facts compel manufacturers to achieve productivity gains by investing in capital equipment. What’s more, new models of machine tools, and the latest offerings in workholding and automation, are significantly more productive than they were just five or 10 years ago.
Science to Enhance the Art
Let’s step back at this point to look at the background of this research and the methodology behind it. We at GBI think significant changes in our research methods make the findings of greater value than ever before.
For the past decade or so, we created our own forecasts for machine tool unit orders based on several leading indicators considered critical for the metalworking industry. While correlations between the leading indicators and machine tool orders were used to create the forecast, the process was largely an “artistic” one: that is, it was based on what we believe are keen perceptions and a deep wisdom derived from our years of studying this marketplace. Although this approach has proved remarkably accurate, one relying less on interpretation promises to strengthen credibility as well as increase reliability. So, this past summer, GBI developed its first econometric model, using techniques that are more scientific in methodology. This model blends the art and the science of forecasting.
To build the model, GBI started with slightly more than 2,000 economic time series. Examples of an economic time series include the level of aerospace industrial production, consumer spending on motor vehicles and parts, and 10-year treasury rates or other financial activity measured over a certain period of time. GBI transformed each of the economic time series it studied in 150 different ways to derive more than 300,000 economic variables that were then correlated with machine tool unit orders. Using our knowledge of the metalworking industry and statistical analysis tools, we selected the seven variables out of the 300,000 that accounted for almost 70 percent of the variability in machine tool unit orders. Finally, to adjust for the influence of predictable events such as the International Manufacturing Technology Show (IMTS), the annual end-of-year sales surge and so on, two “seasonal” modeling factors were added to push the model’s correlation with actual unit orders up to more than 90 percent.
Based on this model, GBI forecasted in July that machine tool unit orders would be down 14.7 percent by the end of 2016, which means that the annual rate of change in unit orders bottomed in July at roughly 19 percent. The model predicts that the rate of contraction will continue to decelerate in 2017. Therefore, 2017 unit orders will be down 3.7 percent compared with 2016. However, GBI ran 100,000 simulations of the model, which showed that in 2017 unit orders could be down as much as 11.1 percent and up as much as 7.4 percent (see Figure 2). Nevertheless, the key conclusion is that machine tool orders bottomed in the summer of 2016.
Why Sales of Core Machine Tools Sales Are Up
GBI’s 2017 Capital Spending Survey projects that total machine tool spending will fall 1 percent to $6.7 billion in 2017. Despite dropping every year since 2014, this machine tool consumption will still be above $6.5 billion, which is the average of yearly sales from 1958 to 2016. This means that machine tool spending will be above average for the sixth year in a row, indicating that the machine tool market will remain quite competitive.
Even though total machine tool consumption is expected to be down in 2017, core machine tool spending is projected to be up 9 percent next year. Core machine tools are machining centers, turning centers, grinding machines, and EDM equipment that represent basic, mainstream metalworking processes. Therefore, it appears that sales of niche or ancillary equipment, such as rotary transfer machines, gear cutting machines or broaching equipment, are pulling down the total projection for 2017.
Notably, the main reason that core machine tool spending is forecast to increase is a surge in purchases of horizontal machining centers (HMCs; see Figure 3). HMC spending is expected to approach $1.6 billion in 2017, an increase of almost 50 percent over 2016. This level would make spending on HMCs nearly equal to the spending on vertical machining centers (VMCs), which has remained at a consistent level since 2014. The total for HMCs and VMCs is expected to account for roughly 50 percent of all machine tool spending in 2017.
According to Modern Machine Shop’s latest Top Shops benchmarking survey, about 80 percent of facilities use a VMC compared with just 45 percent that use an HMC. (This annual survey asks shops of all types to provide key performance indicators and cite technologies and equipment used in their facilities.) Therefore, the 2017 Capital Spending Survey indicates that shops are making a significant investment in new technology with their planned spending on HMCs. This development is likely because HMCs are generally easier to automate and therefore can potentially boost productivity more than VMCs. This spending pattern reflects increased productivity as the primary motivation to buy a machine tool in 2017.
Job Shops’ Spending to Jump
Job shops are projected to spend almost $2.25 billion on machine tools in 2017. This amount represents an increase of almost 80 percent from 2016. Certainly, this is a dramatic increase, but not an unprecedented one. Typically, spending at job shops tends to fluctuate more compared to spending by companies in specific industries.
Looking at the 10 industries forecasted to spend the most next year, only two—primary metals (steel mills, metal refineries, foundries and the like) and off-road/construction machinery—are projected to actually increase spending in 2017. It is worth noting that this would be the first time that the primary metals industry is in the top five industries on this list. In fact, projected spending for primary metals is significantly higher than any year’s projection since about 2008. Also, it appears that spending in industries related to building off-road/construction machinery is rebounding due to an improved housing market along with the beginning of a recovery in metal prices that also is boosting the mining industry.
The top four industries—job shops, automotive, machinery/equipment and aerospace—will account for almost 67 percent of all machine tool spending in 2017. Although spending by companies in the automotive and aerospace industries is projected to fall slightly in 2017, the spending level in both these industries remains relatively strong from a historical perspective. Also, machine tool spending for these industries would be even higher if job shop figures were added, especially when one considers that approximately 60 percent of job shops do work for the automotive industry and 52 percent do work for the aerospace industry.
The Correct Mix of Equipment Is Critical
The scarcity of skilled labor and the prevalence of competition from around the world are putting a lot of pressure on U.S. metalcutting facilities. More than ever, the right mix of the latest equipment is necessary to remain competitive and profitable. This is not at all surprising. To reference our Top Shops benchmarking survey once more, the most recent results show that the best metalcutting facilities are making a greater investment in four- and five-axis machine tools, as well as the latest workholding and cutting tool technologies, than lower-performing shops. Clearly, it’s the right mix of the latest machining technology that will provide the greatest boost to the level of productivity gains shops are seeking.
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