Gardner Intelligence Blog

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.

Registering 53.4, the Gardner Business Index (GBI) moved marginally lower from the prior month. The latest result indicates that manufacturing continues to expand, albeit it at a lower rate than experienced earlier in the latest business cycle. February marks the 25th consecutive month of expansion in the manufacturing industry according to Gardner’s survey. By comparison, the prior expansionary cycle in 2014 and 2015 lasted only 15 months. Compared to the same month one year ago, the Index is down 11.8 percent, but it is important to remember that February 2018 set an all-time record high reading over 60.0. Gardner Intelligence’s review of the underlying data for the month observed that the Index -calculated as an average of its components- was supported by production, supplier deliveries, new orders and employment. The components which lowered the Index included backlog and exports. Exports was the only component to contract.

February’s data provides additional support to past observations. The first of these is the continuing gradual rebalancing of supplier deliveries with production. Over the last six months, production has expanded at a relatively stable rate while supplier deliveries have experienced slowing growth since surging in mid-2018. This suggests that upstream suppliers are taking a careful approach to rebalancing supplies with current demand.

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