According to the USMTO, there were 1,883 machine tool units sold in July. This was 36.7% more machines sold than July 2010. While this is still an exceptional rate of month-over-month growth, July 2011’s one-month rate of growth was the slowest since March 2010. The annual rate of change for units fell to 77.2% after peaking in May at 83.4%. It seems clear that the growth rate of machine tool unit sales has peaked (August would need more than 2,500 units sold for the growth rate to stop slowing), but the growth rate is still near all-time highs. My forecast for July was 1,800 units, just 4.4% too low.
Real dollar sales in July 2011 were 53.7% higher than they were in July 2010. Again, this is historically strong growth. However, the month-over-month rate of growth is at its slowest pace since March 2010. The rate of growth in real dollar sales peaked in March 2011.
Initial indications from our Capital Spending Survey are for an increase in machine tool consumption in 2012. The results will be available next month at one of several presentations I’m giving. Also, next month my unit forecast for 2012 will be available.
Monetary Indicators
The Fed funds rate remains near all-time lows. Because rates can’t go any lower, they would indicate lower machine tool sales in the future. And, this week the Federal Reserve has a two-day meeting. Speculation is the meeting was extended to two days so Bernanke has time to convince the board members that more quantitative easing (in some form) is necessary.
The monetary base continues to grow. It has now more than tripled in size since the financial crisis erupted in the fall of 2008. Also, the one-month rate of change in the monetary base continues to gyrate wildly. The last time the monetary base swung this wildly was the Great Depression. The swings didn’t end until WWII was over.
The increase in the monetary base is helping to drive the U.S. dollar lower against other currencies. Significant problems in Europe could further drive the dollar lower if the Fed uses U.S. dollars to bail out European banks (which it has been quietly doing since 2008). The historical correlation shows that as the exchange rate falls then machine tool sales increase in the U.S. I think the falling exchange rate has played a significant role in the strength of the machine tool market this year. But, while weakening the currency works in the short term, it is not a good long-term strategy for our economy.
Real Personal Income Excluding Government Transfers
Incomes have increased steadily since reaching their bottom in the summer of 2009. However, they still haven’t reached their pre-recession peak. The one-month rate of change has slowed each of the last five months. The annual rate of change shows that the current growth rate in incomes is significant, but the growth rate appears to have peaked. This should lead to slower growth in durable goods consumer spending.
Real Household Debt Flow
Debt flow remained negative for the 11th straight quarter (it had never been negative for more than a quarter before). But, debt flow is getting closer to being positive again. Much of the increased debt of households in recent quarters has been for student loans, which obviously doesn’t help the machine tool market. But, typically an increase in household debt is a sign that durable goods consumer spending will increase. Whatever your thoughts are on debt levels in the country, this is a short-term positive for the machine tool market.
Real Consumer Durable Goods Spending
After falling for four straight months, durable goods spending increased in July. But, the one-month rate of change was the second lowest since October 2010. The annual rate of change has remained essentially flat since February 2011. Since the Fed funds rate year-over-year change can only be positive, income growth is peaking, and household debt flow is still negative, it looks like real consumer durable goods spending will start growing more slowly in the second half of 2011.
Consumer Durable Goods Industrial Production
Production has increased significantly since it bottomed in early 2009. However, it is still about 10% below the peak production levels from 2004-2008. The annual growth rate has slowed each of the last eight months. Given the trends in the other leading indicators, it appears as if industrial production will continue to see slower growth. The rate of growth is still higher than at any time since 1999. So, while the trend in industrial production is indicating slower growth in machine tool sales, industrial production is still growing fast enough that the slowdown in machine tool sales shouldn’t be too dramatic.
