Gardner Intelligence Blog

In May, the nominal 10-year Treasury rate declined for the seventh month in a row, dropping to 2.40% from a high of 3.15% in October 2018. This was the lowest nominal rate since November 2017. For the month of May, the nominal 10-year Treasury rate averaged 0.01% more than the Fed Funds Rate, which is the overnight lending rate. This is extremely unusual, and it indicates that the market believes a recession is ahead. The Federal Reserve has hinted at lowering the overnight rate several times over the next year, and President Trump has made several public calls for this.

The annual rate of inflation according to the CPI dropped below 2.00% for the fifth time in six months. As a result, the real 10-year Treasury rate was 0.22%, which was the lowest real rate since September 2017.

In April, machine tool unit orders were 1,951, which put orders below 2,000 units for the second time in three months. The 2,000-unit order level is typically the demarcation line between a strong or weak machine tool market. April’s month-over-month rate of change contracted 6.7%, which was the third-straight month of contraction and the fourth in the last five months. While the industry contracted, the Southeast recorded strong growth (more than 16%) and the Northeast recorded modest growth (about 2%).  As a result, the annual rate of growth decelerated for the seventh consecutive month to 3.5%, which was the slowest rate of annual growth since April 2017.

Real dollar orders contracted at a double digit rate for the third month in a row and performed worse than unit orders for the fourth straight month. It appears that builders and distributors  are lowering prices to continue to sell machines, which is a sign of a softening market. In April, real dollar orders contracted 16.0% compared with one year ago. However, the South Central region manage to eke out very minimal growth. The annual rate of growth decelerated for the seventh month in a row to 5.3%, its slowest rate since September 2017.

In April, the monetary base was $3.263 trillion, which was its lowest level since June 2013. April was the 15th consecutive month of month-over-month contraction in the monetary base. For each of the last seven months, the month-over-month rate of contraction was faster than 11%. Only the ten-month period from June 1921 to March 1922 had a longer streak of double-digit contraction month-over-month. 

As a result, the annual rate of change in the money supply contracted for the eighth month in a row, accelerating to -9.6%. This was the fastest rate of annual contraction since August 1922. The money supply is indicating that the current decelerating growth in machine tool orders (and quite likely capital equipment in general) will continue for some time.

The Gardner Business Index (GBI) registered slower growth in its latest reading, finishing May at 50.8, a 13.6% drop from the same month one year ago. All Index readings above 50 indicate manufacturing activity expansion, while values below 50 indicate contracting activity and a reading of exactly 50 indicates no change in activity from the prior month. Gardner Intelligence’s review of the underlying data for the month observed that the Index – calculated as an average of its components – was supported by production, supplier deliveries, employment and new orders. Exports and backlogs both contracted during the month, pulling the Index lower. For the second time since late-2016, backlog activity registered as the fastest-contracting component of the Index. In both instances, backlogs contracted only slightly more than exports.

May’s reading brings the GBI to its lowest reading since December of 2016, when it had crossed above 50 for the first time since April of 2015. Looking at past periods when the overall Index has fallen into contractionary territory, Gardner has observed that exports and backlogs tend to contract several months before new orders begin contracting, which is then quickly followed by production and employment declines. This sequence of events occurred in both 2012 and 2015, and the lag between the initial contraction in backlogs and exports and the later contraction of the overall index took nearly a full year in the 2015 cycle. If that example serves as a guide for the future, then the Index may remain above 50 through nearly all of 2019.

New orders for real durable goods in April totaled $245,248 million, which was down 2.7% from one year ago. April was the third-straight month that new orders contracted more than 2.2%. These are the first consecutive months of contraction since early 2017. The annual rate of growth decelerated for the sixth month in a row, moving from 3.6% to 2.6%. This was the slowest rate of annual growth since August 2017.

Compared with one year ago, few orders for motor vehicles and parts grew just 0.9% in April. That was the slowest month-over-month growth since orders contracted in May 2018. The annual rate of growth accelerated 5.2% and should to decelerate more in future months.