Gardner Intelligence Blog

Change in 10-Yr Treasury Holding Steady

In August, the year-over-year change in the 10-year Treasury rate was 25 basis points. While this was an increase from the previous month, the year-over-year change essentially has held steady since April. While the recent trend in the annual change of the 10-year Treasury rate should result in slower growth in consumer durable goods spending, the change has leveled off, indicating that the affect on spending may be relatively muted.

If anything, the year-over-year change has moved slightly lower in recent months. A continued trend in this direction would be positive for manufacturing and capital equipment consumption. Changes in the real 10-year Treasury rate tend to lead metalworking and machine tool consumption by a long period of time – historically, 12 to 18 months.

Durable Goods Production Accelerates for Third Month

Compared with one year ago, the durable goods industrial production index grew in August 2018 at its fastest rate since July 2014. It increased 4.6 percent, which made August the third consecutive month of accelerating growth. Further, in six of the past seven months the index grew faster than 2.0 percent. As a result, the annual rate of growth accelerated to 2.6 percent, which was the fastest rate of annual growth since March 2015.

On the other hand, new orders of durable goods grew slightly slower in recent months. If this trend continues, then production is due to peak soon, but it is too early to determine if new orders have indeed reached their peak rate of growth.

Cutting Tool Orders Surge for Third Time in Four Months

As durable goods orders, industrial production and capacity utilization have remained strong, cutting tool orders have been robust. Orders were above $200 million for the fifth consecutive month. In July, orders grew 15.3 percent compared with one year ago. This was the third time in the last four months that orders grew more than 11.5 percent. The annual rate of growth accelerated for the second month in a row to 9.3 percent, which was the fastest rate of growth since USCTI data was made public in January 2012.

In addition to the aforementioned leading indicators, the GBI: Metalworking is an excellent leading indicator of cutting tool orders. While the rate of growth in the Index has decelerated, which typically signals decelerating growth in cutting tool orders, it 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.

Machine Tool Orders Pick Up in July

After a slow June, machine tool orders picked up in July, increasing 7.9 percent, which is somewhat unusual in the run-up to IMTS. Orders stayed just above 2,000 units, which is the baseline for a healthy machine tool market. Contrast this development with the 1.7-percent contraction in June. Despite the return to growth, the annual rate of growth decelerated for the third month in a row. However, IMTS should accelerate the annual rate of growth.

Real dollar orders were $375,960,000, which was the lowest total since February, but July’s dollar orders were up 15.0 percent compared with one year ago. While the annual rate of change has slowed the last two months, dollar orders have held onto a faster growth rate better than unit orders. 

Federal Reserve Reduces Monetary Supply in August

With the economy doing quite well, the Federal Reserve took the opportunity to further reduce the money supply in August, causing it to fall to $3.602 trillion, its lowest level since December 2016. Compared with one year ago, the monetary base contracted 8.3 percent, which was the fastest rate of contraction since November 2016. Further, August was the sixth month in a row of accelerating contraction, causing the annual rate of change to grow at a slower rate for the fifth straight month.

If the Federal Reserve continues its paring back of the money supply, then the economy will eventually be negatively impacted, but there is typically a long lead time of 18 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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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.