Is there a catchy word for “super bearish”? If so, two good reasons have just emerged for using it to describe the prospects of the American manufacturing sector. The first is the October report on machine tool orders just released by the sector’s main trade group, the Association for Manufacturing Technology (AMT). The second is the set of accompanying comments from AMT President Douglas K. Woods – who until now has remained relentlessly optimistic in the face of increasingly rotten data.
Machine tools are a small part of the overall U.S. manufacturing base. But they’re a prime indicator of the entire sector’s health because they’re used to make most other manufactured products. In other words, if American industry is buying lots of machine tools, that means it’s going to be turning out lots of goods. That’s also usually good news for the economy as a whole, because if these industrialists are right, that means demand for these goods – including abroad – is robust, along with the odds of growth. But if American manufacturers – and their foreign counterparts – are cutting back on machine tool purchases, you can probably turn all those above sunny assumptions on their heads.
As a result, the October numbers look incredibly discouraging. The big problem isn’t the month-to-month change. New orders only fell by 0.3 percent sequentially in value, after rising by 10.9 percent in September. At the same time, in July and August, orders fell on month. Still, the big problem has to do with the longer-term comparisons. This October’s machine tool orders were 28.3 percent lower than last October. September’s new orders were 49.6 percent lower than they were 12 months earlier. August, 2015’s new orders were 21.2 percent lower than August, 2014’s.
In fact, for the first ten months of this year, orders of U.S.-made machine tools were running 17.4 percent behind last year’s ten-month rate, which means that the rate of deterioration has been accelerating. The solid line in the AMT chart below illustrates the trend. You can see that the three-month moving average for orders, which smooths out short-term fluctuations, is at four-year lows:
Even Woods sounded depressed. He greeted the September year-on-year collapse by noting that these comparisons were distorted by a surge in orders a year before because of all the sales generated by the sector’s big trade show. Woods then added
“Considering the growth in orders we’ve seen over the past two years, this decline is not as bad as it sounds. It’s important to remember that 2014 was a record-setting year, and that some leveling off to minor pull backs are expected.”
Contrast that with Woods’ assessment of October:
“While the general economy continues to grow at a moderate pace, the manufacturing sector is struggling with the effects of a strong dollar, reduced commodity prices, especially oil, and struggles in key export markets like China. As the broader industry faces this slowdown, manufacturers are not making significant capital investment in new manufacturing technology.”
Nor is he optimistic about the foreseeable future: “Market flatness can be expected to remain into 2016, and signs pointing to short-term interest rate hikes from the Federal Reserve could potentially hamper the consumer spending that is currently driving economic growth.”
Not that AMT didn’t see a little ray of sunshine, calling “the second-consecutive monthly increase in order volumes, an encouraging detail in what has been a 15-month stall in overall growth for the manufacturing technology sector.” But you have to admit: That’s pretty thin gruel. And it’s especially disturbing because Wood’s predisposition doesn’t come out of the blue. He has surely been hearing encouraging sentiments from his organization’s members, who no doubt consistently display the can-do attitude that I’ve always found characteristic of American industrialists, despite the most daunting challenges.
That kind of grit has long helped domestic manufacturers – and especially the kinds of smaller companies common in the machine tool sector – overcome much of what clueless American policymakers and predatory foreign rivals have thrown their way. If these dogged manufacturing spirits are indeed eroding, domestic industry will be lucky to keep treading water, much less spark a renaissance.