Gardner Intelligence Blog

Income Shows Consistent Growth

In August 2018, real disposable income was $15,617 billion. As is normally the case, real disposable income set an all-time high this month, up 2.9 percent from one year ago. The rate of growth was unchanged from last month and remained just below the historical average rate of growth of 3.1 percent.

The annual rate of growth remained unchanged at 2.8 percent, as it has since February. This was the fastest rate of annual growth since May 2016, but the rate of change was abnormally flat. Even though the rate of growth has plateaued, it was still a positive sign for durable goods manufacturing.

Gardner Intelligence reviewed the medical industry using Gardner’s proprietary data and the second quarter 2018 financial filings results of nearly 70 publicly-traded medical firms. The review indicates an industry experiencing growth in revenues, earnings, free cash flow and capital expenditures. The latest quarterly results* signaled a slight increase in the growth rate of capital expenditures. The most significant financial improvement in the industry was in earnings growth, which turned positive during the second quarter after contracting during the preceding two quarters.

Capital expenditures, which includes spending on manufacturing and equipment, grew from 2.8 percent at the end of the first quarter of 2018 to 3.7 percent by the end of the second quarter. This reverses the slowing growth trend in capital expenditures which began after capital spending growth reached a peak of over 17 percent in the first half of 2017. An analysis of quarterly data between the fourth quarter of 2014 and the second quarter of 2018 indicates a statistically significant relationship between revenue change during a given quarter and capital expenditure change two quarters later. From this simple linear regression analysis – which considers no other factors – and assuming an accurate forecast of revenues based on the consensus Wall Street forecast, this model would predict total capital spending growth of 11.3 percent during calendar year 2018 before expenditures contract by 6.6 percent in 2019.

The Marginal Buyer Is Driving Machine Tool Consumption

The 2019 Capital Spending Report projects accelerating growth for the machine tool market in 2019. The latest data from Gardner Intelligence sees machine tool consumption increasing 11 percent to $7.748 billion in 2019, with growth occurring across all machine types. This follows increases of 3 and 6 percent in 2017 and 2018 respectively.

In 2018, machine tool prices rose and delivery times lengthened as the demand for capital equipment outpaced the supply. Given the planned spending by machine shops detailed in the report, prices are likely to climb higher and delivery times will remain relatively long as demand remains strong. Of particular note, job shops and manufacturers in the North Central-West and Southeast regions are poised to experience the highest rates of growth in the country.

The Gardner Business Index (GBI) ended September at 56.9, moving only slightly lower from the prior month. While the reading is down from the highest readings recorded during the first quarter, the Index indicated faster growth in September than during even the fastest growing months of 2017. For the month, the Index is up 2.5 percent compared to the same month one year ago. Gardner Intelligence’s review of the underlying data for the month indicates that the Index was driven higher by supplier deliveries, production and new orders. The components which lowered the index’s average-based calculation included employment, backlog, and exports. The exports reading for September fell nearly two points during the month, indicating greater contraction in exports.

For five consecutive months now, supplier deliveries has been the fastest growing component of the Index, generally followed by production. The Gardner Intelligence team has been strongly encouraged by the re-acceleration in new orders since July, as  changes in new orders growth act as a bellwether for future changes in production and backlog, both of which have also improved since July.

Capacity Utilization Climbs to Highest Level in Three Years

Durable goods capacity utilization was 76.0 percent in August 2018, the fastest rate since July 2015. The month-over-month rate of growth was 3.3 percent, which was the fastest rate of growth since July 2014. The 1/12 rate of growth accelerated for the fourth month in a row and grew for the 17th time in 19 months, and the annual rate of growth accelerated for the third straight month, reaching its fastest rate of growth since June 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 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. 

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Reports

Top Shops

‘Top Shops’ is a benchmarking and recognition program designed to help shops build their business.

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.

Capital Spending Survey

An annual survey that collects statistics regarding budgeted spending on machine tools, testing equipment, software and more.

Gardner Business Index

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