Gardner Intelligence Blog

Using the financial data submitted to the Securities and Exchange Commission (SEC) along with forecasts provided by major Wall Street brokerages, Gardner has compiled the financial results for seventeen publicly-traded firms in the containers and packaging industry to assess the current and future state of the industry. The results reveal an industry which has experienced eight consecutive quarters of revenues and earnings growth through the third quarter of 2018. Total inflation-adjusted revenue and earnings growth during this time were 12.6 percent and 18.6 percent respectively. In the latest quarter, the containers and packaging industry achieved year-on-year revenue growth – known as the “12/12” rate of change – of 9.2 percent. Similarly, earnings before interest, taxes and depreciation (EBITDA) achieved a 12/12 growth rate of 12.2 percent during the same period. These strong results enabled the industry to achieve a profit margin not seen since the great recession.

The industry’s financial success in recent years has also been well captured by the Plastics Processing Index – a product of Gardner Intelligence – which measures fundamental business conditions as reported by plastics processors. Among the six components which constitute this Business Index, 2017 and 2018 data indicate an industry which has rarely expanded faster. The index since 2017 has been driven in large part by growth in new orders, production and supplier deliveries. Backlog data collected since the first quarter of 2018 suggest that the industry has struggled to raise production levels sufficiently to match new orders growth, resulting in significant expansion of backlogs in the current calendar year.

Capacity Utilization Stays Above 76 Percent for Fourth Month

Durable goods capacity utilization was 76.4 percent in November 2018, which was the fourth month in a row with a rate greater than 76 percent. That has happened since the first few months of 2015. Therefore, capacity utilization was running at a relatively high sustained rate. That’s good news for capital equipment consumption.

On the other hand, November’s one-month rate of change was 2.4 percent, which was the third month of decelerating growth. Fortunately, the decelerating rate of month-over-month growth has yet to disturb the accelerating growth in the annual rate. Annual growth in durable goods capacity utilization reached 1.8 percent in November, accelerating for the sixth consecutive month to its fastest rate since May 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.

Durable Goods Production Gets Hotter

In November, the index for durable-goods production was at 107.7. November was the fourth consecutive month the index was at least 107.7, and the last four months were four of the five highest durable-goods industrial-production index readings ever. In other words, durable goods production in the U.S. is really strong.

That said, durable goods production has been strong for a while, and the month-over-month rate of growth – now 3.4 percent – has decelerated for three straight months. However, the 3.4-percent growth in November is exactly equal to the historic average.

Change in 10-Year Treasury Rate Levels Off

In November, the year-over-year change in the 10-year Treasury rate was 41 basis points, the third month in a row, the the 10-year Treasury rate was relatively unchanged. With the Federal Reserve not raising rates at its last meeting and President Trump harping on the Federal Reserve for raising rates, could the rise in the year-over-year change in the 10-year Treasury rate be over?

We will probably need a few more months to know the answer to that. However, the growth rates of a number of key economic measures for manufacturing have hit their peak rates of growth and started to slow. This could be why the Federal Reserve did not raise rates, and if the decelerating growth in these key economic measures continue, then we likely won’t see any increase in rates in the near future. Consequently, the change in the 10-year Treasury rate may level off or even begin to fall. Both would be a short-term positive for the economy. Looking at the long term, the 10-year Treasury rate is still half of its historic average, so rates need to raise much further to achieve a more normal economic environment.

Cutting Tool Orders Highest Since Data Released

In October, cutting tool orders were $223.5 million, making October the eighth consecutive month cutting tool orders were above $200 million. On top of that, this represents the greatest total since the data began to be publicly released in January 2012. Clearly, the cutting tool market has been very strong since late spring 2018.

However, October’s orders grew 9.6 percent, which was just the second time since April that the growth rate was in single digits. Growth of 9.6 percent is not bad – in fact, it’s quite good – but it does appear that the rate of growth is beginning to decelerate. Further, the annual rate of growth did slow to 10.0 percent.

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