(What’s Left of) Our Economy: Bullish Signals from Manufacturing About the U.S. Economy

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machine tools, manufacturing, Trade, Trump, {What's Left of) Our Economy

U.S. machine tool orders – for anyone who’s not a manufacturing junkie, could anything sound more boring? And yet, because machine tools of various kinds are what manufacturers use to make a wide range of industrial products, their sales are a key indicator of the sector’s health, and especially its future prospects. After all, if manufacturing companies aren’t feeling optimistic about their businesses, they’re not likely to be ordering many of these generally expensive devices, either to replace worn out equipment or add capacity. If orders are rising strongly, that’s strong evidence that industrial production is likely to strengthen or at least remain strong.

And even if you don’t care much about manufacturing, machine tool orders data speak volumes about whether the economy as a whole is thriving or not – a subject that’s attracted unusual attention lately because the current American recovery has lasted so long, and because some recent statistics are pointing to a growth slowdown – or worse. More specifically, these statistics can reveal whether President Trump’s trade policies are succeeding or failing to achieve one of their prime stated goals – bolstering domestic industry.

The January numbers were released today by the machine tool trade association that tracks them, and the verdict? Thumbs up on all counts. Year-on-year, new business grew by five percent, and there was even a silver lining in the 10.5 percent monthly decline from December levels: January figures almost always fall on a monthly basis (because manufacturers tend to bunch their new orders markedly toward the end of each calendar year), and this January’s decline was half the post-1998 average. In fact, the $396 million figure was the second largest January total in the 22 years during which the industry has been compiling these statistics. Particularly noteworthy: January was the month when most of the last partial federal government shutdown took place. That’s when it was hard to find many Americans optimistic about anything.

Moreover, although these numbers are incredibly volatile month-to-month, the strong surge in machine tool orders that began in early 2017 (coinciding, incidentally, with the advent of the Trump administration) continued apace through 2018 (when he began tariff-ing imports in earnest).

Since manufacturing still only makes up a little less than 11.5 percent of the whole U.S. economy (though it punches way above its weight as a jobs creator), robust machine tool orders are hardly a guarantee against a slowdown – even a significant one. And the future of the President’s trade policy, especially regarding China, remains highly uncertain. But at best, domestic manufacturers’ interest in continuing to buy the stuff that’s used to make other stuff signals that current economic pessimism is a stretch — and that if the economy does run into trouble, neither manufacturing nor President Trump’s approach to trade (which is dominated both ways by industrial goods) will deserve much blame.

(What’s Left of) Our Economy: Is the Bell Tolling for Manufacturing Bellwether Machine Tools?

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AMT, Association for Manufacturing Technology, Douglas K. Woods, machine tools, manufacturing, manufacturing renaissance, {What's Left of) Our Economy

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.

(What’s Left of) Our Economy: Manufacturing Bellwether Hits 5-Year Low

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Association for Manufacturing Technology, industrial production, machine tool orders, machine tools, manufacturing, {What's Left of) Our Economy

“Machine tool orders” may sound pretty wonky, even if you care more about manufacturing than the typical American. Even I haven’t covered them regularly. Actually, though, it’s a key measure of the domestic industry’s health, which is why it’s important to report that the latest results from this data series have just hit a five-year low.

According to the Association For Manufacturing Technology (AMT), a U.S. machine tool industry group, orders for these systems totaled only industry $285.92 million in August . That’s the lowest monthly total since August, 2010. This figure also represented a 10.20 percent drop from the previous month, and a whopping 21.20 percent nosedive over August, 2014. Just for good measure, these latest orders dragged the January-through-August total for this year – $2.77 billion – 10 percent lower than the comparable amount for last year.

I was also struck, moreover, by the downbeat assessment of AMT President Douglas K. Woods. If you’re familiar with AMT’s reports, you know that Woods is a dedicated optimist – which mirrors the can-do attitude common among American manufacturers. But although Woods did stoutly maintain that the machine tool business (his group includes distributors as well as producers) was experiencing a “leveling after a period of strong growth” – which the chart accompanying the figures doesn’t bear out – he also noted “ a sense of unease in manufacturing now as indicated by this reduction in orders combined with drops in the PMI and industrial production” and allowed that “there is some cause for caution.”

It’s important to note that “machine tool orders” is not the same as “machine tool production,” and the AMT specifies that these numbers include both U.S.-made and imported equipment. (In fact, the sector’s trade deficit has generally been rising for literally decades.) But since machine tools are so widely used throughout the domestic manufacturing sector, even higher imports of foreign machine tools signal that American-based industrial companies are expecting more business and gearing up for it, or at least that they feel financially healthy enough to upgrade their factories. Woods’ confidence that the worst is over notwithstanding, this five-year low in machine tool orders is sending exactly the opposite message.

Fortunately, we won’t need to wait much longer for more conclusive reads on the manufacturing winds. On Thursday, the New York and Philadelphia Federal Reserve Banks will issue their October soundings on manufacturing activity in their regions, and on Friday, the Fed in D.C. puts out the September industrial production figures. Look out below?

(What’s Left of) Our Economy: Data, Data Everywhere on Manufacturing

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China, Five-Year Plan, machine tools, manufacturing, Obama, overcapacity, semiconductors, steel, subsidies, {What's Left of) Our Economy

Just when you think you’ve got a decent handle on the wealth of manufacturing-related economic data out there, lots more suddenly comes into focus. So right after this morning’s post on China’s export subsidies, a Twitter friend brought to my attention a New York Times piece on Beijing’s plans to strengthen its homegrown semiconductor industry with resources dwarfing those being spent on trade-related credits.

According to reporter Paul Mozur, (in turn quoting a non-Chinese private sector study), China intends to allocate $170 billion over the next five to ten years to ensure that it moves into world leadership ranks in semiconductor production. Another account of the Chinese program, part of its new Five-Year Plan, reveals that one of Beijing’s priorities is to enter the business of producing the kinds of advanced microprocessors that have long been one of Intel’s mainstays.

Almost on cue came news of an Obama administration announcement of new initiatives to help preserve and improve America’s global standing in advanced manufacturing. Money of course isn’t the only or even the best predictor of how effective these measures will be, and arguably, it will cost less to keep the United States at the manufacturing cutting edge than to bring China closer to it. But it’s at the least interesting that the sums allotted by the White House – $530 million overall – are absolutely dwarfed by the scale of China’s efforts.

Meanwhile, it’s clear that I need to start tracking two more regular sources of manufacturing statistics – the American machine tool industry’s monthly reports on orders in that key sector, and the global steel industry’s figures on output in that segment. Their latest updates have come out in the last two weeks, and neither is looking remotely renaissance-y.

On October 14, the Association for Manufacturing Technologies (AMT) pegged August U.S. orders of machine tools and related products art just under $357 million. That was up less than one percent over August and fully six percent lower than last August’s levels. For the first eight months of this year, orders for these goods were running 2.4 percent behind comparable 2013 levels.

It’s important to note that these AMT figures cover both domestically produced equipment and imports. But since machine tools are so widely used in manufacturing across the board, the numbers are a valuable gauge of the vigor of the domestic manufacturing sector overall.

The steel data released October 27 by the World Steel Association are useful because they report on the production figures for all major steel-making countries. Of special interest: Worldwide steel output (measured by tonnage, not value) held steady in September on a month-to-month and year-on-year. But the U.S. figures? Down 6.1 percent from August, and up only 1.6 percent on a January-through-September basis. And this even though the U.S. Economy has been gaining momentum versus most of the rest of the world, and though the American motor vehicle industry – a major steel user – is still on an impressive tear.

Even weirder: China keeps saying it recognizes it has a huge steel overcapacity problem. But production in the world’s leading steel-maker declined only about two percent from August to September, and is actually up 2.3 percent a January-through-September basis.

Tomorrow we’ll get the advance look at U.S. durable goods manufacturing orders, and all week long, I’ll be tweeting on the new monthly manufacturing surveys from regional branches of the Federal Reserve. Let’s not forget, moreover, the Fed’s upcoming statement on Wednesday on interest rates and the fate of its quantitative easing program, along with the first (of three!) readings on the third quarter’s gross domestic product that comes out Thursday morning. Stay tuned!