Gardner Intelligence Blog

Cutting Tool Orders Started Strong in 2019

In January, cutting-tool orders were $208.3 million, which was the 10th time in 11 months that orders were more than $200 million. Rebounding from a relatively weak December, January orders increased 9.7 percent compared with one year ago. January’s order total pushed the annual rate of growth up to 10.3 percent, which was the fourth month in the last five with annual growth faster than 10 percent. 

However, it seems that slower growth is ahead in 2019. The one-month rate of growth was below 10 percent for the third time in four months. That alone will cause the annual rate growth to slow from its current rate. Also, the GBI: Metalworking is a good leading indicator of cutting-tool orders, and 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 decelerate soon.

2019 Machine Tool Orders Off to Solid Start

After a strong 2018, machine tool orders in 2019 are off to solid start.

In January, unit orders were 2,180, which was the 10th consecutive month and the 17th time in 18 months that orders were more than 2,000 units – our baseline level for a healthy, strong machine tool market. January unit orders grew 7.0 percent compared with one year ago, which was the second time in three months that the one-month rate of change grew. However, the one-month rate of growth generally grew slower in the second half of 2018. Therefore, the annual rate of growth peaked in September and has decelerated since, falling to 8.3 percent in January.

Monetary Base Contraction Accelerates in February

February was the 12th consecutive month of month-over-month contraction in the monetary base, which was $3.368 trillion, its lowest level since July 2013. The rate of contraction has accelerated almost every one of these 12 months, with February’s contraction accelerating to -13.0 percent. That was the fastest rate of contraction since July 1937 and the second fastest since January 1922. In fact, this was the fourth 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 fifth month in a row, accelerating to -7.3 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 Growth Hits 3.2 Percent

In December, the month-over-month rate of growth for durable goods spending was 3.2 percent, which was the fourth month in a row that the growth rate was below the historic average of 5.5 percent. December’s rate of growth was the slowest since January 2014. The annual rate rate of growth was 5.7 percent, decelerating for the fourth straight month. This was the slowest rate of annual growth since February 2017. 

The change in the 10-year Treasury rate rose in the second half of 2018, which put downward pressure on the rate of growth in consumer durable goods spending as most durable goods are bought with credit. However, in the last couple of months, the change in the 10-year Treasury rate has dropped into negative territory again. If this trend continues, then it will be a positive for durable goods spending.

Income Growth Cruises Above Average in December

In December 2018, real disposable income was $14,635 billion. As is normally the case, real disposable income set an all-time high this month, up 3.9 percent from one year ago. December was the first month with above-average income growth (3.1 percent) since October 2015. 

The annual rate of growth accelerated ever so slightly to 2.9 percent, which broke a string of 10 consecutive months of 2.8-percent growth in disposable income. December’s annual rate of growth was the fastest since May 2016. It is possible that the annual rate of growth will accelerate for a few more months

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