|
US Durable Goods Orders
Machine Tool Execs Report Surprisingly Strong
4Q Orders
-
Strength Seen
in All Sectors, Excepting Domestic Auto
-
Little Impact
from Energy Prices, Hurricanes
-
Gulf Coast
Reconstruction Seen As Huge Boost to 2006
By Gary Rosenberger
NEW YORK (EconoPlay) Oct 26 – Durable goods manufacturers blasted past all
obstacles posed by the worst hurricane season in memory, the jump in energy
costs and renewed uncertainty about consumer sentiment to invest heavily in
capital equipment and in the future, say machine-tool executives.
The strength covers broad areas of manufacturing –
aerospace, consumer goods, defense, medical and certainly energy – with one
prominent exception in domestic auto production, they say.
They cite a booming global manufacturing recovery that
backwashed into the U.S., which got a further edge from the weaker dollar.
They see the momentum continuing through 2006 based on
current back orders and the potential for big government spending for rebuilding
hurricane-affected states and defense.
Recent events might also prompt a manufacturing shift back
to U.S. shores now that vulnerabilities at ports have been bared, along with the
high cost of transporting foreign-sourced goods, industry officials add.
“It’s very positive and very strong right now,” said Joe
Romanowski, CEO of Machinery Systems Inc., in Schaumburg, Illinois. “For one,
there’s a lot of money being pumped into the economy by the government as a
consequence of Iraq and Katrina/Rita. As money gets spent on reconstruction it
will drive up demand for cranes, bulldozers and trucks.”
It isn’t just government spending doing the trick.
“Manufacturing companies have been profitable. They are sitting on a lot of
money and they haven’t spent any of it for new capital equipment in the last
three or four years, so there’s some pent-up demand.”
Small job shops were the first to respond to the
manufacturing recovery – “but it’s the big companies now, and they’re exercising
their budget muscle,” Romanowski said.
“We are concerned about energy costs and we’re looking at
that closely. Don’t forget interest rates are up as well. But right now they
have not impacted our order levels,” he added. “We think our customers are
sitting on a lot of money and they’re ready to spend it – and it’s for
additional capacity, not just productivity improvement.”
In this climate, prices for machine tools have risen.
“Let’s just say that negotiations are becoming less brutal – discounting is less
because negotiations are less,” he said.
Donald Lane, president of Makino, a global supplier of
manufacturing production equipment with a U.S. base in Cincinnati, said the only
hesitation he detects is not at all hurricane-related. “It’s in automotive. The
Delphi bankruptcy has everyone concerned, especially because it has banks
sensitive to anyone making automotive parts,” he said.
“Even if you don’t do business with Delphi, you might doing
business with someone that supplies Delphi – and the banks are looking at them
as well to make sure they won’t be affected by a cascading bankruptcy,” Lane
said.
But he views this as a “bump in the road” and finds it
telling that the Delphi bankruptcy does not apply to its dozen new facilities in
China that do not suffer from legacy costs.
Indeed, ex-domestic autos, business is booming. “There’s a
lot of cash among manufacturing companies and they’re willing to spend. High
capital utilization and cash flows signal increased investment activity,” Lane
asserted.
He also sees major offsets from the so-called transplants.
“Japanese automakers are investing like crazy here, so there are a lot of
plusses offsetting the negative.” Other industries, notably energy, defense,
medical and aerospace all “are booming,” he added.
Lane argues U.S. manufacturing can withstand the surge in
energy prices. “It’s a big complex economy with a lot of cross currents and just
not as sensitive to oil shocks as it was in the ‘70s.”
If anything, higher logistics costs for foreign-sourced
goods could prompt a shift away from offshore manufacturing back to domestic.
“Logistics issues are getting bigger and bigger. It’s not just the vulnerability
at ports. Everything from Asia comes in ships that are oil-fueled, and the cost
of shipping is skyrocketing.”
The investment cycle also is favorable. “I would say there
was over-investment from 1998 to 2000 and under-investment from 2001 to 2003 –
and to go back to under-investment in the third year of a recovery sounds very
unlikely to me,” Lane said.
“It’s still positive. You’re not
seeing any slowdown anywhere else, are you?” said Peter Borden, president of
Walker Machinery Co. in Cincinnati. “Opportunities are still increasing with
people looking for new technology and automation, even more than before.”
He described the fourth quarter
as normally a busy time season as clients prepare their budgets for next year –
and the current pace of orders is “slightly up” from a year ago, when activity
surged largely because of the impending expiration of special tax credits.
Borden singled out strength in
aerospace but sees good news across the food chain from the smallest job shops
to big OEMs. “Even the automotive job shops I go into look pretty busy.” He does
admit to not knocking at the door of Delphi these days. “But even they have to
reinvest if they’re going to go forward,” he said.
There is also enormous potential
arising from hurricane reconstruction, and there are early signs of what’s to
come. “We’ve been trying to make a delivery to the East Coast and can’t get a
truck because FEMA is paying truckers bonuses to go to the Gulf Coast,” he said.
“We implemented price increases
when we saw demand improve earlier this year,” he said. Higher costs for steel,
transportation, energy and labor provided further lubricants. “A year ago it was
difficult to wean people from a buyer’s market. That’s completely turned around,
although you still get some people asking for discounts. They’re not getting
them.”
Larry Rhoades, CEO of The Ex One
Company in Irwin, Pennsylvania, a maker and distributor of micro-machining,
laser-based and other high-precision instruments, sees the cards lined up in his
industry’s favor.
“In the new manufacturing
technology world that I live in, things that bring change typically bring
orders,” Rhoades said. As such, Gulf Coast reconstruction and the adjustment
toward more fuel-efficient vehicles should be major plusses going forward.
“I don’t think three dollar gas
is going to reduce manufacturing activity,” he said. “Some significant customers
in the manufacturing world, like Caterpillar, are busier than ever.”
A more immediate concern is “the
health of the domestic auto industry and the trauma it is undergoing.” But the
changeover from large gas-guzzling vehicles to hybrids, diesels and other
fuel-efficient products should engender more, not less, capital investment,
Rhoades argues.
Another concern is the potential
for inflation, which could be a drag on the economy as the Fed responds with
more interest-rate hikes. “That could reduce capital investment, but we haven’t
seen it yet.”
Rhoades who recently attended a
conference of manufacturers reports the mood, overall, remains bullish for
everyone from “the disc-drive guys to the aerospace guys.”
He heard no one complain about a
slowdown as a consequence of the hurricanes and all looked forward to the
rebuilding effort. “The hurricane effect was not, on balance, negative,” he
said. “Katrina and Rita exposed the vulnerability and fragility of U.S. ports
when it comes to bringing in stuff from outside.”
Roger Hayes, president of Huffman Corp., which produces
high-tech tools for aerospace, electrical generation, and medical in Clover,
South Carolina, described a lack of predictability to this market.
“People have this sense that their business is up, but they
have no idea where their next order is coming from,” he said. “You make your
forecast, and it’s wrong, but then the order comes in from somewhere else
anyway.”
His order books are “huge,” up by 70% from 18 months ago
and “still we haven’t seen any supply problems.”
The greatest growth is in aerospace. “Aerospace capital
investment is expected to quadruple and that’s a target market for us,” Hayes
said. “They’re outsourcing everything under the sun and job shops are very busy.
They’re going flat out and can’t hire and train people fast enough. These are
the same guys that were nearly wiped out in the last four years.”
He is very optimistic about the future. “Corporate profits
are at a record high, capacity is strained. I am very high on 2006,” he said.
There are other pieces to this puzzlingly strong recovery.
“I have never seen an alignment of political forces that have been stronger and
more supportive of manufacturing both at the federal and local level and across
party lines,” he said. “And the dollar makes our products cheaper. We ship half
our products offshore, and it’s just getting better.”
Robert Gardner, spokesman for the Association of
Manufacturing Technology, said a forecasting conference earlier this month
sounded a very positive tone. “For machine tools, we’re looking at positive
growth over the next two to four years, fueled by global industrial development
and the need for new technology,” he said.
He sees growth in the U.S. at “a slower pace” than in the
rest of the world, but adds that domestic machine-tool manufacturers are now
dealing in a global marketplace anyway.
“We saw no change in sentiment because of the hurricanes or
high energy costs. The general mood continues to be one of optimism,” Gardner
said. “Spending for capital goods is also a way to cope with energy costs in the
same way that it was used to cope with labor costs.”
Gary Schiffres, who oversees the U.S. Machine Tool
Consumption report for the American Machine Tool Distributors’ Association, sees
activity hinging on what sectors and regions individual companies focus on. “For
example, medical instrumentation is strong and it has been strong for quite a
while – but automotive is certainly weakening.”
He is taking a wait-and-see attitude on what impact energy
costs will have on near-term capital investment, but long term it should drive
machine-tool orders as manufacturers readjust to new circumstances
The U.S. Commerce Department is scheduled to release
durable goods orders data for September on Thursday at 8:30 a.m. ET. The above
commentary covered September and October and looked ahead to next year.
For more than a decade Gary
Rosenberger’s reality based Economic Forecasting Service Column surveyed sentiment among business people and
their trade associations. They anticipate economic data and provide a sounding
into various sectors of the U.S. economy beyond the numbers. It has a proven and
reliable track record.
Newsroom:
garynyc@att.net, 212-780-0532
| 
![[Company Logo Image]](images/CHECKMARK.jpg)
EconoPlay
®
