Gardner Intelligence Blog

Change in 10-Year Treasury Appears Positive

In December, the year-over-year change in the 10-year Treasury rate was 12 basis points, which was the lowest change rate since March 2018. That March was the last time the change in the 10-year Treasury rate was negative. In December 2017, the nominal 10-year Treasury rate had been rising, but in December 2018 it had declined for the second month in a row. Having adjusted for inflation, the real rate fell to 39 basis points, which was the lowest rate since December 2017.

It could be that the 10-year Treasury rate is declining, falling below 3.00 percent for the first time in three months, because of an anticipated slow down in the U.S. economy. However, both durable-goods capacity utilization and industrial production recorded very strong rates of growth in December. Perhaps the economy isn’t slowing as much as has been feared. 

Cutting Tool Orders Grow More Than 10 Percent

In November, cutting tool orders were $209.4 million, making November the ninth-consecutive month cutting tool orders were above $200 million. While cutting tool orders fell from their record high of $223.6 million in October, the month-over-month rate of growth from 9.6 percent to 10.1, topping 10 percent for the sixth time in eight months. The annual rate of growth was more than 10 percent for the third-straight month. The annual rate of growth has steadily accelerated since April 2018.

And, there looks to be room further acceleration into early 2019. In December, durable goods production grew at its second-fastest rate since July 2015, pushing the annual rate of growth to 3.4 percent. The annual rate of growth was above the historic average for the first time since May 2013.

Growth in Machine Tool Orders Near Peak

In November, unit orders were 2,556, which was the third time in four months  with orders more than 2,500 units. October, the one month in the last four month that was the exception, had 2,499 units ordered. Typically, 2,000 units per month is a sign of a strong machine tool market, making the last four months quite good from a historical perspective.

However, November’s unit orders were up just 4.1 percent from one year ago. Since March 2017, there were just two months that performed worse than this November compared with one year ago – June and October 2018. Growth in machine tool unit orders seems to be cooling, but this was not unexpected given the direction of many leading indicators. It is important to stress that we are still near peak machine tool growth, so orders will continue to grow for some time in 2019. They will just grow at a slower rate. 

Monetary Base Signals Peak Capital Equipment Spending Growth

December was the 10th-straight month of month-over-month contraction in the monetary base, which was $3.420 trillion, its lowest level since August 2013. The rate of contraction has accelerated almost every one of these 10 months, with December’s rate accelerating to -11.8 percent, which was the fastest since October 2016 and second fastest since August 1937. In fact, this was the fifth month in a row that the one-month rate of change in the money supply contracted more than 8 percent. That has never happened before. 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 third month in a row, decelerating to -4.4 percent. This was the fastest rate of annual contraction since July 2017. 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. 

Disposable Income Growth Unchanged for Sixth Month

In November 2018, real disposable income was $14,460 billion. As is normally the case, real disposable income set an all-time high this month, up 2.8 percent from one year ago. The month-over-month rate of growth was either 2.7 or 2.8 percent for the sixth consecutive month.

The annual rate of growth remained unchanged at 2.7 percent for the fourth month in a row. This followed five straight months of 2.8-percent growth. The annual rate of growth should stay at this rate for at least the next three, if not the next six, months.

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