Gardner Intelligence Blog

Growth in Durable Goods Production Remains Positive

In July, the index for production of durable goods was at 104.7, which was its lowest level since last July. It hit that low point after reaching its highest level ever last month. While the index dropped in July, it still increased 1.0% compared with one year ago, extending its growth streak to 32 months. However, the growth rate has slowed in recent months, falling below the historical average for the last six months.

The annual rate of growth, which is easier to correlate with other data points, decelerated to 2.7%, down from a peak growth rate of 3.5% in February. July’s growth rate was the slowest since June 2018. The annual rate of growth is likely to decelerate even more as the month-over-month rate of growth has been relatively weak the last six months. Further, the key leading indicator of production – durable goods new orders – is indicating slower growth in industrial production.

Capacity Utilization Contracts in July

In July, durable goods capacity utilization was 75.6%, contracting 0.4% compared with one year ago. This was the second time in four months that the month-over-month rate of change contracted.

Annual growth in capacity utilization of durable goods decelerated from 2.0% to 1.7% last month. That is down from its peak of 2.8% in January and its slowest rate of growth since February 2018. As the annual rate of growth tends to lead capital equipment consumption by seven-to-10 months, it is signaling that capital equipment consumption will peak later this fall. However, as machine tool orders have already peaked, capacity utilization is signaling slower growth – if not contraction – in capital equipment consumption for the remainder of 2019.

10-Year Treasury Rate

In July, the nominal 10-year Treasury rate declined for the ninth month in a row, dropping to 2.06% from a high of 3.15% in October 2018. This was the lowest nominal rate since October 2016. July was the second month in a row that the nominal 10-year Treasury rate averaged less than the Fed Funds Rate, which is the overnight lending rate. This is unusual, and it seems to happen in the lead up to a recession.

The annual rate of inflation according to the CPI dropped below 2.00% for the seventh time in eight months. As a result, the real 10-year Treasury rate was 0.08%, which was the second lowest real rate since April 2013 (only last month was lower).

June Cutting Tool Orders Decline

In June, cutting tool orders were $198.9 million, which was the first time that orders were below $200 million in 2019. June orders contracted by 8.6% compared with one year ago, which was the fourth consecutive month of month-over-month contraction and the fastest rate of contraction in those four months. The annual rate of growth decelerated for the fifth-straight month to 5.5%, which was the slowest rate of annual growth since September 2017.

The GBI: Metalworking is a good leading indicator of cutting tool orders. The rate of change in the Index began contracting in March and the contraction has accelerated since. The Index is clearly indicating that the annual rate of growth in cutting tool orders will continue to decelerate, if not begin to contract, for the remainder of 2019. The GBI typically leads cutting tool orders by seven-to-10 months.

Data Shows Pockets of Strength in Machine Tool Orders

June machine tool orders were 2,123 units and $353,401,000. Unit orders for the month contracted 2.2% compared with one year ago, marking contraction for the fifth straight month and six of the last seven months. Annually, unit orders continued to grow at a slower rate, but they are likely to contract next month.

June dollar orders contracted 15.8% compared with one year ago, mirroring unit orders by contracting for the fifth straight month and six of the last seven months. However, while the unit contraction was relatively muted, the dollar contraction was more than 10% each of the last five months. Annually, dollar orders contracted in June for the first time since February 2017.

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