–Manufacturers Demand More Equipment to Meet Growing Demand
–Weak Dollar Boosts Overseas Orders
–Machine Makers Buck Downbeat Economic Trend

By Jon Hurdle

PHILADELPHIA (MNI) – Orders for U.S.-made machine tools doubled in
the first eight months of 2011 and are set for further gains as the
capacity utilization rises, a weak dollar boosts overseas orders for
U.S. manufactured goods, and manufacturers seek to install new equipment
before a new tax law goes into effect, officials said.

Manufacturing technology orders jumped to $3.43 billion for the
eight months to the end of August, 101 percent higher than the year-ago
period, according to the Association for Manufacturing Technology and
the American Machine Tool Distributors Association.

“Despite news reports that wider economic growth may be stagnating,
the manufacturing technology industry is sustaining its momentum,” said
AMT President Douglas Woods, in a statement.

“With orders still up substantially over last year, there is
clearly optimism within the industry as firms are seeing future growth
opportunities that merit new capital investment,” he said.

While final data for September are not yet available, it will
probably show new orders in the high $400 million to low $500 million
range, said Pat McGibbon, vice president of Strategic Information and
Research for AMT.

“I think we are going to see a rise in manufacturing output,” he
said.

For August alone, orders were down 9.4 percent from July but 88.5
percent higher than a year ago. The strongest growth was seen in the
AMT’s Midwest region where orders surged 129 percent in the first eight
months. Orders more than doubled in the West and Central regions.

Orders for non-defense capital goods overall increased by 5.2
percent to $78.1 billion in August, while shipments rose 2.7 percent to
$71.3 billion, the U.S. Commerce Department said.

One of the drivers of the anticipated increase in machine tool
demand is the growing rate of capacity utilization whose industry-wide
rate rose to 77.4 percent in August, according to the Federal Reserve.

A CapU rate of around 75 percent can be expected to trigger
increased demand for machine tools from industries such as automotive
manufacturing and medical appliances, said McGibbon.

The acquisition of new capital goods will help fill an estimated
300,000 manufacturing jobs that are currently open, he added.

Machine tool orders are also being boosted by a planned cut in tax
write-offs for capital goods depreciation, McGibbon said. If the federal
government implements new tax laws manufacturers will only be able to
write off 50 percent of the depreciation starting on Jan. 1, 2012, down
from 100 percent at present.

The projected change has been boosting purchases of machine
technology such as multi-access lathes but there is now speculation that
the write-off reduction will be deferred for a year because demand for
new machine tools has been so great that customers have been forced to
wait for months to obtain the technology.

The wait for some machines — whose purchase price is typically
$100,000 to $250,000 — has grown to seven or eight months from the
normal two or three months, said Peter Borden, president of the AMTDA
which represents about 350 manufacturers, dealers and distributors.

As a result, many capital goods industries have urged the federal
government to delay the tax change for a year to allow customers to take
delivery of their machines, a requirement for qualifying for the tax
deduction.

“A lot of capital goods manufacturers have petitioned to continue
the 100 percent depreciation,” Borden said.

Business is “booming” for machine tool makers, Borden said, after
suffering a 70 percent decline in 2009, a partial recovery in 2010 and a
strong 2011 that has seen a return to pre-recession levels of business.

Underlying the growth in U.S. machine-tool sales is a continuing
drive for higher productivity. Constant advances in technology allow
companies to increase output with fewer employees, Borden said.

More recently, the industry is being helped by the growing trend of
“reshoring” in which U.S. manufacturers are discovering that the
perceived cost advantage of making goods overseas is being eroded by
increasing wages in countries like India and China, and the cost of
shipping the goods to U.S. and other markets.

As a result, more American manufacturers are moving their
operations back to the U.S. where the cost differential with Chinese
labor isn’t as great as it was thanks to the recession, which has
boosted the pool of available domestic workers. Makers of manufacturing
technology are benefiting from the increased demand for equipment from
repatriated companies.

The U.S. response to the Chinese challenge is to make fewer goods
of a higher quality, Borden said. “You’re not going to compete with the
Chinese on volume if you’re just making widgets,” he said.

The weak dollar is also expected to help overseas demand for U.S.
manufactured goods including machine tools, which have traditionally
benefited when the currency falls.

A monthly report for AMTDA on trends in the machine tool industry
argues that machine tool sales can be expected to rise in step with
consumer debt, which is showing signs of rising. An increase in
household debt suggests spending on durable goods will increase,
boosting sales for the tools that make those items.

—

Editors’ note: Reality Check stories survey sentiment among
business people and trade associations. They are intended to complement
and anticipate economic data and to provide a view into specific sectors
of the economy.

The U.S. Commerce Department is scheduled to release (September)
data on durable goods at 8:30 a.m. eastern time Wednesday.

** Market News International **

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