Metalworking Forecasting Tools
Tools Aerospace Computers & Electronics Construction Machinery Engines, Turbines, & Power
Farm Equipment Machinery Medical Motor Vehciles & Parts Oil Durable Goods
Durable Goods
Text Box: 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. Current Comment - Because the Fed funds rate is now virtually zero, the year over year change is moving up (forcing the line down on this chart). Based on the historical correlation the increasing year over year change in the Fed funds rate should put further downward pressure on real durable goods spending.
Text Box: 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. Current Comment - Real personal income ex. government transfers is contracting more slowly. This indicator shows that the recent uptick in real durable goods consumer spending may not last.
Text Box: 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. Current Comment - Household debt flow has fallen dramatically since mid 2006. While there has been a quarter of very slight contraction in household debt flow, the current contraction in household debt flow is the first extended period of contraction since the Great Depression. It is highly likely that we will need to see household debt flow turn positive before there will be a sustained recovery in consumer durable goods spending.
Text Box: 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. Current Comment - Industrial production followed the overall downtrend in durable goods consumption from September 2002 to August 2006. Stabilizing industrial production levels are causing the consumer durable goods industrial production to contract more slowly.
Text Box: 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. Current Comment - Industrial production is now in a decelerating contraction mode. Machine tool sales started to contract in November 2007. This contraction will extend well into 2010. But, unit sales have hit a bottom and now are contracting more slowly.
Text Box: 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. Current Comment - Incomes are contracting more slowly. Real consumer spending has started growing faster again but it started to do so even though incomes are still contracting. This gives cause for concern on the sustainability of the recovery.
Text Box: An increase in consumer spending results in more investment in the economy - specifically investment in goods that are capable of of providing the necessary capability for companies to provide more of the goods and services that consumers are buying. Of course, this works in reverse too. Following is the correlation between real PCE and Real total capital goods new orders. Current Comment - Real personal consumption expenditures are growing faster. This is helping lift capital goods orders.
Text Box: Real total capital goods new orders is a good leading indicator of durable goods excluding motor vehicle and parts industrial production. Note that this industrial production is different than that of the consumer durable goods industrial production shown above in that it focuses more on "business" durable goods industrial production. We have a short set of real total capital goods new orders data to work with because the deflator only goes back to 1997. Current Comment - As real total capital goods new orders contract we see that industrial production of these goods peaked in early 2008 and are now contracting.
Text Box: Just like the consumer side of things, "business" durable goods industrial production is a good leading indicator of machine tool unit sales. On average, changes in durable goods industrial production leads machine tool sales by 8 months. The lag time here is about half of what it is between consumer durable goods industrial production and machine tool sales. This makes some sense because businesses are probably more vigilant in watching their spending and balance sheets than consumers and are therefore more quick to adjust their business practices. Current Comment - Over the last four or five years, this industrial production curve seems to do a better job of explaining machine tool sales. This makes sense because the industries driving machine tool sales during this period have been aerospace and anything oil/energy related.
Text Box: This chart averages the rate of change curves together for the two industrial production curves above and correlates them to the rate of change in machine tool sales. This combined industrial production curve represents the entire market for machine tools and probably does the best job of indicating the direction of machine tool sales. However, it is important to look at the individual industrial production curves and machine tool sales to see whether it is consumer spending or business spending that is driving the market.
Sources
Fed Funds Rate
Average Hourly Earnings
Consumer Price Index
Consumer Spending
Industrial Production
USMTC
Machine Tool Sales (EDA)
For more information contact Steve Kline, Jr., financial analyst.
513-527-8800
skline2@gardnerweb.com
Links to other Financial Data from Gardner Publications, Inc.
2008 Capital Spending Survey and Forecast Results
Metalworking Business Index
2008 Capital Spending Survey and Forecast Demographic Reports 
Current and past surveys conducted by Gardner Research
Gardner Publications, Inc. publishes the following magazines:
Modern Machine Shop
Production Machining
Moldmaking Technology
Automotive Design & Production