The Rise of the Machines (Makers)

The Rise of the Machines (Makers)

Activity in machinery sector rising; improvements seen in agricultural-machinery market.

The U.S. economy, as measured by U.S. industrial production, is expanding. The annual growth rate of 4.1% is on target with the forecast we presented in March 2011. IndustryWeek readers should be moving forward with confidence that more opportunities await us in the latter half of 2012 and in 2013. The forecast calls for the economy to continue to expand at about this pace through the first quarter of 2013. A noticeably slower rate of rise will characterize the remainder of 2013.

We should not gloss over the fact that the industrial side of the economy is improving, as evidenced by a rising trend in the year-over-year comparisons shown on the chart below. The June U.S. industrial-production quarterly and annual comparisons will experience a mild upward bias into 2013. Readers tied to the industrial side of the economy will be busy through the rest of the year.

U.S. Industrial Production Index on the Rise

Year-over-year comparisons show industrial production rising into 2013.

Some of the news of late has been less than bullish. The Purchasing Managers Index fell to 49.7 in June, the first decline below 50 since July 2009, signaling a potential future contraction in the manufacturing sector. Remember that changes in the PMI do not reflect an immediate change in the speed or direction of the U.S. economy. Viewing the PMI as a leading indicator provides an external indication that we are on track with our outlook for the rest of this year and with our forecast of noticeably slower growth in the U.S. economy in the latter half of 2013.

Farm-Machinery Orders Recovering

Industrial-machinery new orders are rising, but that rate of growth is diminishing. The annual new orders are at the highest level in three and a half years. Expect new orders to improve through the first half of 2013 as the U.S. economy and manufacturing sector expand.

The good news in the new-orders trend is showing up in the production figures. Food-products production reached a record level in June (annual production basis); production rose 2.1% over the past 12 months. Expect mild gains through the rest of the year as consumer spending supports demand for food products. Petroleum-refineries production rose 3.6% over the past year, bringing annual production back to 2008 levels. The expansion of shale-oil drilling has increased domestic oil extraction, a trend likely to continue in the near term. Additionally, relatively high oil prices and increasing demand for petroleum products should keep production in an overall rising trend through 2013.

The annual production trend in farm machinery and equipment production is 7% below the year-ago level, but the situation is improving with each month. The quarterly year-over-year comparison should move above year-ago levels late this year with the annual trend showing a positive comparison by March 2013.

Improvement is coming even as a drought engulfs more than half of the continental United States, making this the widest drought since 1956. The National Climatic Data Center reported that 58% of the country was in a moderate to extreme drought through June 2012.

While crops are taking a beating, farmers are not nearly as bad off as they were in the 1988 drought, largely because of improved insurances, deleveraging, record-high grain prices, record-high land prices, increased output and strong global demand for U.S. grain. Insurance reimbursement and the sale of the remaining grain at record-high prices are protecting many farmers from the worst effects of the drought.

Dairy, beef, hog, poultry and fish farmers are facing dramatically higher feed costs. Sales into these verticals could be harder to come by unless there is a demonstrable and near-term return on investment. The good news here is that better insurance programs are also helping these vertical markets.

Since the United States is the world’s largest food-exporting nation, the need for improved productivity will help IndustryWeek readers who participate in the agricultural market. Concurrent with this need is the fact that working capital in this sector is still healthy, except for young enterprises or those highly leveraged firms engaged in aggressive roll-up activity. While these certainly are challenging times, careful planning in preparation for changes in the business cycle can yield positive results.
 

Contributing Editor Alan Beaulieu is an economist and president of ITR (itreconomics.com). He is co-author, with his brother Brian, of “Make Your Move,” a book on spotting business-cycle trends.

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