Metalworking Forecasting Tools

Interest rates are one of the earliest leading indicators for the entire economy. Because durable goods are higher-priced, longer-lasting items, consumers often take out loans or use lines of credit to buy them. Therefore, interest rates are a good leading indicator of consumer spending on durable goods. In the chart below we've inverted the year over year change in the Feds Fund rate because as rates go down it encourages spending. On average changes in the Fed Funds rate lead changes in the consumption of durable goods by 16 months.

While interest rates are a good indicator of durable goods consumption, they aren't the only leading indicator. If consumers don't have rising real wages they are unlikely to buy more durable goods, even with lowering rates. The chart below shows that changes in real personal income excluding government transfers is indeed a leading indicator of durable goods consumption. On average changes in incomes lead changes in durable goods consumption by five months.

The next chart shows a third leading indicator for real durable goods PCE - household debt flow. More housing debt leads to more consumer spending on durable goods since most people purchase these goods through the use of debt. Because the flow can be positive or negative we cannot use a rate of change curve at any point time. However, a rate of change does in fact show that debt flow leads consumer durable goods spending.

Of course as consumers spend more or less on durable goods then manufacturers will adjust their production to the appropriate levels. While one might think that improved supply chain management would have shortened the gap between durable goods consumption and production this does not appear to be the case when looking at the chart below. Because the time between changes has been stable over time supply chain management perhaps has had a greater impact in shifting who holds inventory instead of shortening the time between changes in spending and production. On average changes in durable goods consumtpion lead changes in durable consumer goods industrial production by two months.

For many years our Capital Spending Survey has shown the link between high capacity utilization rates and high spending on machine tools. But, the capacity utilization rates collected by the government are not the best measurement to use because someone must determine how much capacity in is in the marketplace. So, here we show that industrial production, which is a measure of the units produced, is a leading indicator of machine tool sales. Relatively small changes in industrial production lead to much larger swings in machine tool sales. On average changes in durable goods industrial production lead changes in machine tool sales by 18 months.

Of course, consumers aren't the only ones that buy durable goods. A significant portion of durable goods consumption comes from other businesses - processors, manufacturers, etc. In an attempt to forecast machine tool sales from the business-to-business side of the economy, we start with real personal income excluding government transfers and its correlation to real personal consumption expenditures (this includes both goods and services). In the U.S., when people make more money they spend more money. The chart below shows that as incomes go up so does consumer spending. On average changes incomes lead changes in consumer spending by five months.