Money Supply Signals Increased Capital Spending

The annual rate of growth has accelerated the last two months, which is a very positive signal for future capital spending.

(Positive) In January 2018, the monetary base was $3.841 trillion. This was the lowest level for the monetary base since July 2017. However, compared with one year ago, the monetary base increased 6.4 percent, which was the seventh month in a row of. The annual rate of growth accelerated for the second month after 21 months of contraction. In January, the annual rate of growth was 2.2 percent, which was the fastest rate of annual growth since August 2015.

Typically, accelerating growth in the monetary base leads to accelerating growth in capital equipment spending, particularly machine tool orders. The lag time is usually quite long, anywhere from 18 to 30 months as seen on the attached chart. While the correlation on the chart is open to interpretation, I think the accelerating growth in the monetary base in 2013 and 2014 is driving accelerating growth in machine tool orders in 2017 and will continue to do so into 2018. This is likely to result in slowing growth and/or contraction in machine in tool orders in 2019 and maybe early 2020. Or, perhaps the recent accelerating growth in the monetary base keeps capital spending growing longer than the normal cycle time would indicate.

Reports

World Machine Tool Survey

An independent annual survey that collects statistics from machine tool consuming and producing countries and compares them in real U.S. dollars.

Gardner Business Index

A diffusion index measuring month-to-month changes in activity at durable goods and discrete parts manufacturing facilities.

Capital Spending Survey

An annual survey that collects statistics regarding budgeted spending on machine tools, testing equipment, software and more that are then projected across the metalworking industry based on plant size.