Gardner Intelligence Blog

December Machine Tool Orders Total 2,300

In December, unit orders were 2,314, which was the ninth-consecutive month and the 16th time in 17 months that orders were more than 2,000 units –  our baseline level for a healthy, strong machine tool market. While the level of unit orders remained strong throughout 2018, they have started to slip when compared to previous periods. December unit orders were down 17.9 percent compared with one year ago, which was the second time in three months that the one-month rate of change contracted. As a result, the annual rate of growth peaked in September and has decelerated since. The one piece of advice of my father, who worked on Gardner’s Capital Spending Survey for decades, gave me was that IMTS is always a turning point for the good or the bad. Sure enough, it looks that IMTS was once again a turning point for the industry.

However, the Northeast did buck the trend of contracting unit orders in December, as its unit orders were up 2.8 percent compared with one year ago. The region’s unit orders have grown for six straight months and nine of the last 10 months.

Monetary Base Accelerates Rate of Contraction

January was the 11th-consecutive month of month-over-month contraction in the monetary base, which was $3.357 trillion, its lowest level since July 2013. The rate of contraction has accelerated almost every one of these 11 months, with December’s contraction accelerating to -12.6 percent. That was the fastest rate of contraction since July 1937 and the second fastest since February 1922. In fact, this was the third month in a row that the one-month rate of change in the money supply contracted more than 10 percent. The last time that happened was 1937 and 1922. Neither of those time periods were particularly good, as both involved a major recession or depression. While the current contraction is a response to the unprecedented increase in the money supply following the Great Recession in 2008 and 2009 and is completely necessary, it does indicate that there could be unexpected and difficult-to-predict economic events in the future.

As a result, the annual rate of change in the money supply contracted for the fourth month in a row, decelerating to -6.0 percent. This was the fastest rate of annual contraction since April 1938. The annual rate of change peaked in March 2018, indicating that the rate of growth in capital-equipment consumption should peak between March 2019 and March 2020, as there is typically a long lead time of 12 to 24 months between changes in the money supply and changes in capital equipment consumption. That said, the lead time has shortened since the Great Recession due to the dramatic effects of the massive amount of money the Federal Reserve created to pump up the economy. 

Durable Goods Orders Hit Peak Growth

New orders for real durable goods in November 2018 totaled $244,576 million. Compared with one year ago, new orders grew just 1.9 percent. This was the fifth consecutive month of growth, but it was the slowest rate of growth since June 2018 and the second slowest since October 2017. While the one-month rate of change grew for the 17th  time in 18 months, the annual rate of growth decelerated to 6.0 from 6.5 percent. This was the slowest rate of annual growth since June 2018.

It seems clear that the rate of growth in new orders of durable goods has peaked and will grow slower heading into 2019. This becomes more likely when looking at the trend of real consumer durable-goods spending, a good leading indicator of real new orders in durable goods. Spending growth has slowed sharply the last couple of months, indicating slowing growth in new orders.

Registering 53.9, the Gardner Business Index (GBI) began the new year indicating improved business conditions after posting a series of slowing growth signals during the final quarter of 2018. This latest result raises the Index back into the range of growth readings from earlier in the current business cycle. Over the last two years, the GBI has averaged a reading of 56.1, including a historically high reading of 60.1 in February of 2018. As a result of the Index’s climb towards its all-time high a year ago, the latest reading compared is down 7.0 percent from a year ago. Gardner Intelligence’s review of the underlying data for the month indicates that the Index – calculated as an average – was supported by production, supplier deliveries and new orders. The components which lowered the Index included employment, backlog and exports. Only exports reported a contractionary reading during the month.

For the first time since April of 2018, production expanded faster than supplier deliveries, with the reading for production increasing markedly while the expansion in supplier deliveries slowed. This intersecting of the two readings may be an early indicator that supply chains are close to being – or have become – balanced with current levels of production. This change comes after supplier delivery readings spent most of 2018 attempting to catch up with the unusually strong rise in new orders, which peaked in early 2018 and has been highly elevated by historical standards since early 2017.

The electronics industry entered 2019 overshadowed by concerns of shrinking demand for electronics goods in China, joined with tepid demand in the U.S.  This was capped by Apple’s January 2nd announcement of weaker-than-expected fourth-quarter 2018 sales of its core electronics products.  Such headwinds at the start of the year combined with an extended U.S. government shutdown and prolonged tariff negotiations with China to generate concern among many businesses. These events have complicated matters for those looking for insights into what 2019 may hold and how to respond in the face potentially greater near-term volatility.  These early announcements sent the Dow Jones Industrial Index into a frenzy during which it fell more than 10 percent in the course of just a few weeks in December.  This was in part because Apple’s shares constitute a nearly 5-percent stake in the Dow Jones Industrial Index and more than a 10-percent stake in the Nasdaq 100, according to Factset.

Examining the electronics industry – less Apple’s share – illustrates an industry that is expected to see inflation-adjusted revenue growth of 3.5 percent in 2019, combined with even stronger earnings growth. This is based on the actual and forecasted financial results of nearly 60 electronics industry firms generating $658 billion in revenues in the 12-month period ending with the third quarter of 2018.  Including Apple’s third quarter 2018 projections pushes the industry’s overall revenue higher to 8.5-percent by year-end 2019. From a domestic perspective, the sector seems expected to mirror the overall economy’s growth; however, firms with greater exposure to China may have to be more cautious during the year.

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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.

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An annual survey that collects statistics regarding budgeted spending on machine tools, testing equipment, software and more.

Gardner Business Index

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