AMT Viewpoint: So Far So Good in 2014

March 20, 2014

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Pat McGibbon, Association for Manufacturing Technology economist, says most market indicators gauging consumer and business optimism have stayed relatively buoyant despite recent difficulties. This means the underlying economy is strong and will quicken its pace.

The end of 2013 and beginning of 2014 brought mixed signals from a variety of economic indicators, but generally, we at AMT  - Association For Manufacturing Technology gather that the opening quarter holds promise.

Consumers are still optimistic. The University of Michigan’s Consumer Sentiment Index is a proxy for the optimism or pessimism of consumers, and the indicator has held steady around 80 -- a good level suggesting that households see the economy going in a positive direction as well as their wealth situation improving as housing prices climb.

Orders for durable goods and the Institute for Supply Management’s purchasing managers index (PMI) similarly gauge optimism or pessimism within the manufacturing sector. Both of these indicators have fallen a bit in recent months; the ISM PMI sits at 53.2 (still indicating expansion), while durable goods orders in the month of January fell to about $225 billion – down from a high of $244 billion last June.

One measure that has grabbed some attention of late is the Baltic Dry Index, produced by the UK-based Baltic Exchange. This indicator briefly fluctuated upward to a high of around 2,300 in December, only to fall precipitously by a full half to its current levels around 1,100. In general, this indicator tracks the demand for shipping vessels for dry bulk goods; a sharp rise or fall in the reading can be an early sign of a bust or boom in world trade in commodities.

There is some debate over whether the fall seen so far this year is a warning of such a bust or merely reflects an oversupply of shipping vessels, which would also lead to the fall in the index. Given that the lead-up to the 2008 downturn saw significant overproduction of these vessels, it looks very likely that this drop in the index is due to the latter scenario.

Prices for raw materials like steel, aluminum, and copper correlate positively with manufacturing technology orders and have hovered at relatively low levels compared with the beginning of 2013 (and even further down from levels seen in 2011). A drop like this may presage somewhat slower order growth in the future, as the prices of these commodities reflect their global demand.

The counterweight, however, is that the reduced cost of these materials, much like the reduced cost of financing, tends to spur production -- and price savings in materials means savings that can be passed along to customers. The U.S. is already a leading energy producer, and the impact of lower energy costs mixed with lower prices of materials is a huge boost to U.S. manufacturers’ global competitiveness.

Despite the mixed signals, manufacturing technology end-user industries are doing well. In December, auto sales topped off at 15.3 million units for 2013, a little lower than analysts’ expectations but still higher than 2012. Housing starts rose precipitously in November and December and only have come down in January from their highest levels in five years (due to the exceptionally cold winter).

Housing starts will likely remain strong into 2014 -- good news for manufacturing technology customers in the construction market. The fact that demand for housing has sustained itself despite the recent rise in mortgage rates suggests a strengthening economy going forward.

Understanding publicly available measures like the ones above can be very helpful in making sense of market uncertainty. We at AMT are keeping our ears to the ground for market data and analysis.

 

Pat McGibbon is vice president of industry intelligence and engagement for AMT – The Association For Manufacturing Technology. Based in McLean, Va., AMT represents and promotes U.S.-based manufacturing technology and its members — those who design, build, sell, and service the continuously evolving technology that lies at the heart of manufacturing. For more, visit AMT’s website at www.amtonline.org.
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