More evidence of increased capital equipment spending foreseen

Major indices and order numbers point to a robust market for manufacturing equipment.

By Steve Kuehn, Managing Editor


H

as the market really returned for machine tools and other capital equipment? Recent announcements from key industry organizations regarding capital equipment spending and economic activity in the U.S. manufacturing sector all seem to indicate that it has, and will continue for at least the next six months.

Most recently, the Association for Manufacturing Technology (AMT) and the American Machine Tool Distributors' Assn. (AMTDA) August 2004 figures for U.S. machine tool consumption totaled nearly $223 million—a figure up 6.4% from July and up 54% from the $146 million figure reported for August 2003. With a year-to-date total of $1.779 billion, 2004 is up 38.4% compared with 2003.

"With machine-tool consumption up 38.4% for the year, this reinforces the results seen at IMTS," declared John Byrd, AMT President. "Exhibitors at IMTS didn't need numbers to tell them that a capital investment recovery is underway. They came away from the show with orders and with a renewed optimism about the growing manufacturing revival."

The United States Machine Tool Consumption (USMTC) report, jointly compiled AMT and AMTDA, provides regional and national U.S. consumption data of domestic and imported machine tools and related equipment.

Manufacturers Alliance Reports Expansion
The manufacturing expansion is expected to continue over the next couple of quarters, according to the quarterly Manufacturers Alliance/MAPI Survey on the Business Outlook. The September 2004 composite index of 75, while retrenching slightly from an all-time high of 80 in June 2004, nevertheless signals strength in the manufacturing sector and remains high relative to its historical trend over the past 13 years.

&ldquoOverall, the business outlook indices are high in absolute terms and point to continued expansion of manufacturing sector activity,&rdquo said Daniel Meckstroth, chief economist for the Manufacturers Alliance/MAPI. &ldquoWhile the pace of growth may have slowed in the third quarter, the survey shows that the manufacturing expansion is broadly based, with most industries growing, and has a solid foundation of rising domestic and foreign demand.&rdquo

Capital Investment Rising
Of particular note to machine builders and automation suppliers is the Alliance&rsquos upbeat assessment of capital spending plans. The investment index question asked executives how capital investment in 2005 would compare to investment in 2004. The index improved to 69% in this survey from 64 % in September 2003. This relative optimism suggests continued expansion of investment spending next year.

According to the Alliance, the survey reflects the views on current and future business conditions of 62 senior financial executives representing a broad range of manufacturing industries. While a variety of indices are included in the survey, the business outlook index is a weighted sum of shipments, backlogs, inventories, and profit margin indexes. A composite business index above 50 indicates that overall manufacturing activity is expected to increase over the next three months. It should be noted, however, that the index measures the direction of change rather than the absolute strength of activity in manufacturing.

Supply Executives Chime In
In the latest Manufacturing ISM Report On Business released October 1, economic activity in the manufacturing sector during September grew for the 16th consecutive month, while the overall economy grew for the 35th consecutive month.

The report issued by Norbert J. Ore, C.P.M., chair of the Institute for Supply Management Manufacturing Business Survey Committee and group director, strategic sourcing and procurement, Georgia-Pacific Corporation. "The manufacturing sector continued to grow during September, but at a slightly slower rate. Both new orders and production remain strong, and employment growth accelerated."

ISM's PMI registered 58.5% in September, a decrease of 0.5 percentage point when compared to 59% in August. ISM's New Orders Index declined 3.1 points from 61.2% in August to 58.1% in September. ISM's Production Index increased 2.1 points from 59.5% in August to 61.6% in September. The ISM Employment Index is at 58.1% for September, an increase of 2.4 points when compared to the 55.7% reported in August.

Comments from respondents were typical of a growing manufacturing sector said ISM. Concerns range from problems with product launches to seasonal issues and strikes.

Florida&rsquos hurricanes caused problems for some businesses while others saw a pickup in demand. The employment picture is improving according to the respondents as they mention both blue-collar and white-collar new hires. The growth in inventories appears to be voluntary as companies build inventories for "stocking of finished goods for resale," for "hedging against price increases," and, as one member responded simply, "more business, more inventory."

The PMI indicates that the manufacturing economy grew in September for the 16th consecutive month. The PMI for September registered 58.5%, a 0.5 point decrease when compared to the August reading of 59%. A reading above 50% indicates that the manufacturing economy is generally expanding; below 50% indicates that it is generally contracting.

"September was surprisingly strong given the recent slowing of growth in new orders. Production and employment were particularly encouraging as both indexes increased when compared to August. Any concern over inventory growth would seem to be offset by the decline in customer inventories," said Ore.

In September, 15 industries reported growth including Glass, Stone & Aggregate; Rubber & Plastic Products; Industrial & Commercial Equipment & Computers; Tobacco; Apparel; Transportation & Equipment; Chemicals; Food; Wood & Wood Products; Electronic Components & Equipment; Printing & Publishing; Instruments & Photographic Equipment; Paper; and Fabricated Metals.

PMI in excess of 42.8%, over a period of time, generally indicates an expansion of the overall economy. The September PMI indicates that both the overall economy and the manufacturing sector are growing. The past relationship between the PMI and the overall economy indicates that the average PMI for January through September (61.5%) corresponds to a 6.8% increase in real gross domestic product (GDP). In addition, if the PMI for September (58.5%) is annualized, this corresponds to a 5.7% increase in GDP.


To view a graph of total U.S. Machine Tool Consumption, click the Download Now button below.
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