Economic News Blog
Posted by: Steven Kline, Jr. 1. June 2012

March Machine Tool Orders Remain Strong

According to USMTO, there were 2,304 machine tool units sold in March 2012. This is the third highest (only March and September of 2011 were better) unit sales figure since September 2008. While the sales level is clearly still quite strong, March’s unit sales were 5.4% lower than they were last March. This is the first contraction in the one-month rate of change since December 2009. But, this isn’t a surprise. My forecast for March was 2,300 units – an error of just 0.17%. For the first quarter of 2012, my forecast was too low by 6.2%.

While it was inevitable that the rate of growth in machine tool sales would down, the market is still very strong (see my comments on industrial production below). And, I think 2012 will see higher machine tool sales than expected (assuming the situation in Greece doesn’t have some disastrous effect on the U.S. economy).

Fed Funds Rate

For the first time since February 2011, the Fed funds rate was higher than it was one year ago. Of course the rate is still so low - 0.14% - that the change hardly matters. More importantly, the Fed has been making noise about another QE, including this week. I think the Fed is nervous about Greece and the possible contagion effects in Portugal, Spain, and Italy.

Real Personal Income ex. Government Transfers

Incomes continue to grow but at a slower rate. The one-month rate of change has grown less than 2% each of the last three months. That hasn’t happened since May 2010. And, the annual rate of change has slowed each of the last nine months.

Real Consumer Durable Goods Spending
Spending is at an all-time high. The one-month rate of change has grown 6.1% to 9.3% every month since March 2011 – a run of remarkably consistent growth. The annual rate of change has shown slower growth each of the last seven months. However, the annual rate of change should level off if we continue to see consistent one-month growth. But, the slowing growth in incomes are indicating that we will see further slowing in the annual rate of change for consumer durable goods spending.

Consumer Durable Goods Industrial Production

The consumer durable goods industrial production index was 94.9 in April 2012. This is the index’s third highest value since February 2008. The only two months higher were February and March of this year. April industrial production was 13.3% higher than the production level in April 2011. This is the fastest rate of growth since June 2010. Three of the last four months, the one-month rate of change has been above 10%. This is pushing the annual rate of change to grow faster as well – it has done so each of the last six months. It is why capital equipment and tooling continue to be in such high demand and should be for at least the remained of 2012.

Because the growth in spending is still relatively fast and reshoring is a real phenomenon (more than many realize I think), industrial production is growing faster even when the leading indicator says it should be slowing. The divergence from the historical relationship between spending and production can continue for some time due to the specifics of this cycle. But, if consumer durable goods spending slows enough then it will start to be a drag on production, which ultimately lead to further slowing in machine tool sales.

Chart - Fed Funds Rate vs. Durable Goods Manufacturing
Chart - St. Louis Adjusted Monitary Base

Metalworking Business Index

With a reading of 54.9, the MBI showed that the metalworking industry has grown at a fairly consistent rate since October 2011. The metalworking industry has grown for 33 months. However, April was the first month of noticeably slower growth since October 2011.

Four of the six sub-indices helped move the industry’s rate of growth lower. Most notably, new orders (to 56.4 from 63.4) and production (to 59.0 from 63.0) saw significant slowdowns in their rates of growth. While the rate of growth for new orders seems to have slipped below the average rate for this expansion, the rate of growth in production remains fairly strong. Because production grew faster than new orders, backlogs moved from a strong growth to contraction in April. Also, contributing to the slower rate of industry growth was the supplier deliveries sub-index. However, the change was not that great. Supplier deliveries are still indicating wide spread strength in the manufacturing supply chain.

Going in the opposite direction were employment and exports. Employment saw faster growth in the April and has grown for 12 consecutive months. Exports are still contracting, but they did so at a slower rate in April. This helped keep the industry’s rate of growth up.

Future business expectations have fallen to their lowest level since November 2011. However, expectations are still notably above the level seen in the first half of 2011. While expectations have come down a little, metalworking facilities continue to buy equipment at a significant rate. Average spending per plant has been trending up and reached its second highest level since June 2011.

Complete MBI Results here.

Steve Kline, Jr.
Director of Market Intelligence
Gardner Business Media, Inc.

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