Gardner Intelligence Blog

Growth in Capacity Utilization Accelerates

Durable goods capacity utilization was 76.6 percent in October 2018, the fastest rate since July 2015. The month-over-month rate of growth was 3.0 percent, which was the second time in three months with growth faster than 3.0 percent. Further, capacity utilization grew for the 15th consecutive month. The annual rate of growth accelerated for the fifth straight month, reaching its fastest rate of growth since May 2015. Throughout late 2017 and 2018, the growth rate in capacity utilization was relatively tepid given the strong growth in the GBI: Metalworking backlog index since late 2016. Perhaps we are seeing a delayed response in durable goods capacity utilization due to the increase in backlogs. With backlogs still growing at a strong, albeit slower rate, capacity utilization should see accelerating growth through at least the end of 2018. 

The backlog index tends to lead capacity utilization by seven to 10 months, and capacity utilization tends to lead capital equipment consumption by seven to 10 months. Capacity utilization should peak in early 2019, which would lead to a peak in capital equipment consumption some time in the second half of 2019. 

Cutting Tool Orders Grow 16.7 Percent in September

In September, cutting tool orders were above $200 million for the seventh consecutive month, growing 16.7 percent compared with one year ago. This was the fifth time in the last six months that order growth was in double digits, and September was the second fastest rate of month-over-month growth since December 2014. The annual rate of growth accelerate to 10.5 percent, the fastest rate of growth since USCTI data was made public in January 2012.

The GBI: Metalworking is an excellent leading indicator of cutting tool orders. While the rate of growth in the Index has decelerated, which typically signals decelerating growth in cutting tool orders, the index has remained at a very high level since early 2017. The consistently strong growth at metalworking facilities is a likely reason for the recent surge in cutting tool orders, but with the GBI leading cutting tool orders by seven to 10 months, it is likely that the annual rate of growth in cutting tool orders will peak soon.

Nominal 10-Year Treasury Rate Highest Since May 2011

In October, the year-over-year change in the 10-year Treasury rate was 41 basis points. This was the only slightly lower than the previous month, keeping the year-over-year change near its highest level since March 2016. The change in the 10-year rate is indicating an economic slow down may occur in 2019. Changes in the real 10-year Treasury rate tend to lead capital equipment consumption by a relatively long period of time – historically, 12 to 18 months.

In October, the nominal 10-year Treasury rate was 3.15 percent, which was the highest the nominal rate has been since May 2011. Even at this level, the nominal rate was still less than half its historical average of 6.15 percent. However, with inflation consistently above 2.0 percent since September 2017, the real 10-year Treasury rate remained low at 0.69 percent. October was the 21st consecutive month the real rate was below 1.00 percent. However, amazingly, we have not seen average interest rates since May 2000.

IMTS Leads to Strong Machine Tool Orders

As IMTS took place this past September, it was not surprising that machine tool orders for September were quite strong. Unit orders were 2,855, more than 35 percent higher than one year ago and well above the 2,000 level that typically defines a strong machine tool market. However, for the first time ever in an IMTS year, unit orders were higher in August than they were in September.

Typically, in an IMTS year, September orders are at least 20 percent higher than August. A couple possible reasons for this immediately come to mind. First, builders and distributors, often thought to hold orders leading up to IMTS for booking at the show, wanted to get orders on the books right away since the machine tool market is so tight. Second, buyers did not want to wait until the show to place orders to get their place in line for delivery as delivery times have grown from eight months to two years, depending on machine type, from the more typical four to five months. Perhaps there are other more likely reasons though.

Monetary Base Contracts on Annual Rate

For the third month in a row, the one-month rate of change in the money supply contracted more than 8 percent. Overall, this was the eighth consecutive month that the monetary base contracted. In October, the monetary base was $3.541 trillion, its lowest level since September 2013. As a result, the annual rate of change in the money supply contracted for the first time since November 2017. 

If the Federal Reserve continues paring back the money supply, then the economy will eventually be negatively impacted, but there is typically a long lead time of 18 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. 

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