Gardner Intelligence Blog

Capacity Utilization Reaches Highest Rate in Four Years

Durable goods capacity utilization was 77.5 percent in December 2018, which was the fifth month in a row with a rate greater than 76 percent, in addition to being the highest rate of durable goods capacity utilization in four years. Virtually the entire second half of the year was revised higher. That’s good news for capital equipment consumption.

December’s one-month rate of change was 3.9 percent, which was the fastest rate of growth since July 2014. Annual growth in durable-goods capacity utilization reached 2.1 percent, accelerating for the seventh-consecutive month to its fastest rate since March 2015. Again, that’s good news for capital equipment consumption. The annual rate of growth in durable-goods capacity utilization tends to lead capital equipment consumption by seven to 10 months.

Production Grows Much Faster than Historic Average

In December, the index for durable-goods production was at 106.7. While this was the lowest reading since July 2018, December’s index grew 4.7 compared with one year ago. That was the second fastest month-over-month rate of growth since July 2014. It was the third time in five months that the growth rate was faster than 4.0 percent, and December’s rate of growth was 38 percent faster than the historic average month-over-month rate.

The annual rate of growth, which is easier to correlate with other data points, continued to accelerate in November. The rate of growth accelerated for the seventh-straight month, reaching 3.4 percent, the fastest rate of annual growth since May 2013. It was the first month with faster-than-average annual growth since May 2013, as well. The accelerating growth trend will continue for at least the next couple of months, which is a positive sign for capital equipment consumption.

Change in 10-Year Treasury Appears Positive

In December, the year-over-year change in the 10-year Treasury rate was 12 basis points, which was the lowest change rate since March 2018. That March was the last time the change in the 10-year Treasury rate was negative. In December 2017, the nominal 10-year Treasury rate had been rising, but in December 2018 it had declined for the second month in a row. Having adjusted for inflation, the real rate fell to 39 basis points, which was the lowest rate since December 2017.

It could be that the 10-year Treasury rate is declining, falling below 3.00 percent for the first time in three months, because of an anticipated slow down in the U.S. economy. However, both durable-goods capacity utilization and industrial production recorded very strong rates of growth in December. Perhaps the economy isn’t slowing as much as has been feared. 

Cutting Tool Orders Grow More Than 10 Percent

In November, cutting tool orders were $209.4 million, making November the ninth-consecutive month cutting tool orders were above $200 million. While cutting tool orders fell from their record high of $223.6 million in October, the month-over-month rate of growth from 9.6 percent to 10.1, topping 10 percent for the sixth time in eight months. The annual rate of growth was more than 10 percent for the third-straight month. The annual rate of growth has steadily accelerated since April 2018.

And, there looks to be room further acceleration into early 2019. In December, durable goods production grew at its second-fastest rate since July 2015, pushing the annual rate of growth to 3.4 percent. The annual rate of growth was above the historic average for the first time since May 2013.

Growth in Machine Tool Orders Near Peak

In November, unit orders were 2,556, which was the third time in four months  with orders more than 2,500 units. October, the one month in the last four month that was the exception, had 2,499 units ordered. Typically, 2,000 units per month is a sign of a strong machine tool market, making the last four months quite good from a historical perspective.

However, November’s unit orders were up just 4.1 percent from one year ago. Since March 2017, there were just two months that performed worse than this November compared with one year ago – June and October 2018. Growth in machine tool unit orders seems to be cooling, but this was not unexpected given the direction of many leading indicators. It is important to stress that we are still near peak machine tool growth, so orders will continue to grow for some time in 2019. They will just grow at a slower rate. 

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