Machinery and components manufacturing: Capital spending set to pick up again
by Jim Haughey, director of economics for Reed Business Information -- Industrial Distribution, 10/24/2005
Machinery and components shipments grew at slightly below a 2 percent annual pace in the first half of 2005, after rising 8.1 percent in 2004. The slow period coincided with a brief period when the United States dollar appreciated, making U.S. exports less price competitive in foreign markets, and manufacturers focused on reducing surplus inventories rather than capacity expansion.
A 5 percent growth pace is expected in the second half of 2005 now that inventories have returned to an acceptable level, the $US is again declining and manufacturing capacity utilization has rebounded to nearly 80 percent, the usual threshold for a surge in capacity investment spending.
The turnabout began in August with an outsize 6.2 percent jump in shipments. This was primarily a surge in aircraft deliveries, but every machinery and component industry experienced a rise in sales in August and an even larger rise in orders.
The turnabout was interrupted temporarily in September with a strike at Boeing, now settled, and shutdowns forced by the Gulf hurricanes that reduced factory production. The September, post-Katrina, survey of manufacturing conditions by the Institute of Supply Management reported an unusually large gain in orders, production and sales. This assures that the production lost in September will be made up later in the fall.
Source: Census Bureau
Forecast: Reed Research Group
Machinery Manufacturing Shipments Outlook
|
| Annual % Change in Shipments | ||
|
|
|
|
|
|
| 2004 | 2005 | 2006 |
| Fabricated metal | 10.9 | 5.9 | 5.4 |
| Machinery | 13.0 | 8.0 | 3.5 |
| Electrical | 5.0 | 7.5 | 7.1 |
| Plastic & Rubber | 8.0 | 7.4 | 6.2 |
| Aerospace | 10.0 | 3.4 | 11.3 |
| Motor Vehicle | 4.1 | -2.4 | 1.5 |
|
Total | 8.1 | 3.6 | 4.5 |
Source: US Department of Commerce
Forecast: Reed Research Group
Machinery and component shipments are forecast to increase 4.5 percent in 2006, and will continue expanding, although more slowly, into 2007. Vehicles account for much of the growth slowdown from 2004 to 2007.
Off-road vehicle sales surged in 2004 as fleet managers caught up on replacement delayed during the extended period of slow economic growth in 2000–03. The same sales patterned occurred for heavy trucks and industrial trucks. Passenger vehicle sales were pulled ahead to 2004 with aggressive discounting, and sales are now suffering from 50 percent higher fuel costs.
The investment environment continues to weaken, but will remain better than average into 2007. Export sales growth will continuer to outpace domestic sales growth with world economic growth remaining more than 4 percent, and the $US dollar depreciating 5 percent to 8 percent more by late next year.
While credit costs are now steadily rising, it is mostly for short-term inventory and operating loans. Long-term interest rates for investment loans are unchanged from a year ago, and are now lower than most of the time in the previous few years. These rates depend primarily on inflation expectations, so they will only be pushed up from 4.4 percent and 4.5 percent to 5.3 percent by late next year. This is an unusually small interest rate restraint on investment spending compared to previous investment cycles.
The aircraft and electrical industries will both expand faster next year then this year. This is the normal cyclical pattern of peak growth at the very tail end of a business expansion.
For electrical manufacturers, it’s because so much of their product becomes part of infrastructure, and nonresidential buildings where construction spending has only recently beginning to expand in this cycle.
For aircraft, the growth pickup next year is for rising foreign airline orders, especially from developing countries, and a small improvement in the world share of U.S. aircraft manufacturers. This is in place of the usual late-cycle improvement in orders from U.S. air carriers, many of whom remain beset with surplus equipment and junk status balance sheets.
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