Two important metrics tracking the health of the US manufacturing sector have diverged wildly in October. The two statistics, manufacturing technology orders and cutting tool consumption, normally track together in either a growth or a recessionary economy. What's going on?
October tech orders down 35% from September
October U.S. manufacturing technology orders totaled $417.80 million according to AMT – The Association For Manufacturing Technology. This total was down 35.0% from September and down 6.2% when compared with the total of $445.64 million reported for October 2013. Overall, it's not bad news; with a year-to-date total of $4,150.41 million, 2014 is up 3.8% compared with last year.
“As we move toward the end of 2014, we saw much of what we predicted for manufacturing technology orders through the year – low growth, but stability for order volume. The monthly drop from October isn’t unexpected, as since 1998 orders have dropped an average of 24% in any month following IMTS,” said Douglas K. Woods, President, AMT – The Association For Manufacturing Technology. “We continue to see growth in key industries, like automotive, medical, and aerospace. We believe the environment will stay ripe for capital equipment investment in 2015 and bring more good news for manufacturing overall.”
AMT Vice President - Strategic Analytics Pat McGibbon comments on USMTO numbers and the manufacturing technology market in the U.S. in this video:
Machines down, but tools up
The message is optimistic, which is no surprise coming from an industry association president, but the same organization, the AMT, has also reported that cutting tool consumption is up 9.7 percent over September. That statistic was released in the Cutting Tool Market Report, a joint program of the AMT and the U.S. Cutting Tool Institute. Is the downturn in machinery just a phenomenon of the IMTS show? Possibly. IMTS is a favorite venue for machine buyers to cut deals and announce major machine purchases, but the 35 percent drop is well below the 24 percent average decline expected in a post-IMTS month. This suggests one of two scenarios: One, that machine tool sales are weakening significantly at the end of the year as manufacturers retrench in the face of an uncertain 2015, and Two, a significant surge in job shop and Tier 2 and 3 business, a sector which is flexible enough to wait for a show year to price shop for equipment.
Cutting tool orders vs. durable goods: Trending upwards, gradually
Machine sales down: It's actually good news
I suspect that it's a surge in smaller manufacturing that's driving the so-called decline, as small and medium-sized businesses take advantage of the inevitable discounts and show "specials" common at IMTS. Many machine vendors visited by this writer reported significant dealmaking on the show floor. Higher levels of activity in the lower tiers of the OEM supply chain are highly significant. Original equipment manufacturers tend to buy total production capability as turnkey lines. This requires advanced planning that may take years, and often corresponds to standard product lifecycle planning. When it's time for a new Silverado, GM doesn't go bargain-hunting for equipment at IMTS and neither do its major suppliers. Further down the supply chain however, part makers with fresh contracts in hand may be faced with a dilemma: qualify existing tooling and equipment for the new job, or take the opportunity to upgrade and buy productivity as well as capability.
With historically low interest rates, the new-buy option would seem to be a no-brainer, but lower links in the supply chain have been burned before. Although economic indicators suggest that the Great Recession is behind us, few have the stomach to bet the company on single-digit productivity improvements. With retail auto sales remaining strong however, and relentless cost-down pressures from OEM's and Tier Ones, suppliers that don't "up gun" with high productivity equipment risk watching already slim margins vanish altogether.
Cutting tools: a more reliable metric for October
The USCTI/AMT cutting tool consumption report shows a significant uptrend in cutting tool use in October, up 9.7 percent over September. Many analysts regard cutting tool consumption as a more reliable indicator of sector health than machine sales. Cutting tools are a true indicator of capacity utilization since they reflect usage rates of existing equipment as well as expansion due to new machine purchases. Cutting tool consumption statistics are also machine agnostic: a new project needs the same number of drill bits for example, regardless of the sophistication or size of the machine drilling the holes. Year-over-year, cutting tool consumption is up 3.3% in October, but the big spike over September is telling.
Small and medium-size machines delivered in the wake of IMTS have started production, suggesting that unused existing machine capacity in the lower tiers has been used up, and real growth is now occurring. This augurs well for competitiveness in the sector, as newer multi-axis equipment combined with lower-cost automation allows smaller players in the supply chain to keep a lid on labor costs.
“October 2014 has given some indication that we have turned the proverbial corner in the cutting tool industry,” said Tom Haag, president of USCTI. “Sales volume has recorded the best month in over two years going back to March 2012 and four of the last five months have outperformed 2013. The increased sales immediately after IMTS in Chicago have created a momentum that has continued to swell into the fourth quarter.”
For more information, visit the AMT website at www.amtonline.org