Gardner Intelligence Blog

Growth in Cutting Tool Orders Slows Heading into 2019

In December, cutting tool orders were $189.1 million, which was the first month orders were below $200 million since February 2018. Orders still grew 5.2 percent compared with December 2017, but that rate of month-over-month growth was the slowest since March 2018. While the annual rate of growth was faster than 10 percent the last three months, in December it slowed to 9.9 percent. 

It seems that the end of 2018 will mark the peak of growth in cutting tool orders this cycle, with orders growing slower in 2019. 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 may have already peaked.

Change in 10-Year Rate Reverses Course

The nominal 10-year Treasury declined for the third month in a row to 2.71 percent from a high of 3.15 percent in October 2018. This was the lowest nominal rate since January 2018. At the same time, the annual rate of inflation according to the CPI has dropped, too. In January, the annual CPI was 1.55 percent, which was down nearly 50 percent from its high of 2.95 percent in July 2018. The result was a real 10-year Treasury rate of 31 basis points, which was the lowest real rate since December 2017.

In January, the year-over-year change in the 10-year Treasury rate was -17 basis points, which was the first month the change was below zero since March 2018 and the lowest change since January 2018. The change declined for the second month in a row, indicating that the change in the 10-year Treasury rate has reversed course and is now a positive leading indicator for manufacturing, durable goods and capital equipment. 

Production Grows for 26th Consecutive Month

In January, the index for production of durable goods was at 105.3. While this was the lowest reading since July 2018, January’s index grew 3.8 compared with one year ago. That was the slowest month-over-month rate of growth since July 2018. 

The annual rate of growth, which is easier to correlate with other data points, continued to accelerate in January. The rate of growth accelerated for the eighth straight month, reaching 3.6 percent, the fastest rate of annual growth since April 2013. It was the second month in a row with faster-than-average annual growth  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.

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. 

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