Pat McGibbon, Association For Manufacturing Technology's vice president of intelligence, says the environment of aging machinery at manufacturers, high corporate profitability and cash sitting on the sidelines, and foreign direct investment will result in machinery purchases in the second half.
It was a surprise that the January U.S. Manufacturing Technology Orders (USMTO) report
covering monthly metal forming and cutting machinery sales was up from a year earlier, particularly given the bad weather throughout the month that slowed business activity.
The USMTO numbers for the first two months of 2014, meanwhile, show a modest fall from the same period in 2013. The fact that orders have not been on a runaway pace during the opening weeks of 2014 should not be a surprise. In addition to the weather, employment numbers haven't been promising, and the Federal Reserve's stimulus easing will end earlier than expected, according to Fed Chair Janet Yellen.
Still, in the face of this information, manufacturing industry economists have generally agreed on at least one thing: The manufacturing technology market looks good from here to 2016. The underlying fundamentals look good for the metalworking machinery market.
Corporate profits for manufacturing firms are at historic highs and don't appear to be in danger of rapidly decompressing. The profitability of these companies, which relying on manufacturing technology, suggests that they have the capability to make investments and expand.
Meanwhile, foreign direct investment and reshoring are bringing millions of dollars in investment and billions in production to industrial America. These investments also mean the creation of thousands of jobs. The investment environment in America is clearly on the upswing.
In addition, the dollar remains weak against most currencies other than the Japanese yen, making exports more competitive. Plus, the United States has always had a highly educated and productive workforce. And, for the first time in decades, the country is the largest producer of energy in the world, thereby lowering the cost of a significant factor of production.
Machinery customers flush with cash and the unusually high average age of in-place capital equipment suggest a pickup in capital equipment replacement. Neil Shah of The Wall Street Journal
noted this in his Jan. 12 article, "Why Business Investment Could Break Out."
The article's accompanying infographic hits three basic points: 1) that business investment is on the rise, 2) that interest rates to finance investment are at historical lows, and 3) that the average age of corporate fixed assets is at an all-time high of 21.7 years.
That means there are as many manufacturing machines in use today that were bought before 1992 as those that were acquired since then. Just imagine the return on investment machinery customers could make if they were to replace 1985 machinery with 2014 versions.
Finally, there is a mountain of cash sidelined in non-productive corporate accounts to avoid risk, provide financial security, and act as operating funds backstops -- nearly half a trillion dollars, an amount equal to about 3 percent of the U.S. GDP.
As corporate America's sense of stability increases because of the U.S. financial situation, lower risk in making investments, continued expansion of the economy, and global security improvements, U.S. companies will begin to put these large sums of cash to work by investing in capital equipment.
The slow start to 2014 is nothing to fret over. The stage is set, and the pump is primed for significant growth in manufacturing technology purchases in the second half of 2014.
Photo credit: Makino
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.