U.S. producers of manufacturing technology always get a little nervous when the orders get too good to believe. That nervousness often sets in after 24 months of expansion. Yet, no one flinched this past summer as that mark came and went. Backlogs were still growing. August 2018, a month before IMTS, posted half a billion dollars in orders – unheard of! Then IMTS did not fail to deliver a topper to the August numbers as orders spiked to more than $600 million. October was unexpectedly strong, and November was seven percent higher than November 2017. Expectations are that U.S. consumption of manufacturing technology in 2018 will be a stellar 20 percent larger than 2017.
The question is how long the expansion will continue. Stock market swings, concerns about the government shutdown, and continued trade friction with major trading partners have many businesses concerned about the ability of manufacturing to grow even modestly in 2019. The growth in backlogs has slowed to a crawl though, and in some products, they are at levels not seen since the 1980s. Other signs of growing pains began to appear late in November 2018 as well. Finding transportation to deliver machines became problematic. Riggers to site machines on customers’ floors were equally difficult to schedule. These are two issues that continued into January and don’t seem likely to ease until February at the earliest.
The “goldrush” in manufacturing technology orders seems to have hit the limit but members and analysts don’t expect a recoil in order activity. In fact, members and analysts alike have healthy outlooks for continued growth in 2019. The pace will be considerably slower throughout the year. There are a couple of voices looking for a soft Q4 and a brief downturn in early 2020. However, the outlook for capital spending over the next three to four years is positive. Key to the outlook are four points.
The auto industry is once again moving the responsibility for investment in capital spending further down the supply chain. This is particularly true in the area of power train components. Members in the east and great lakes region have shared that their usual customers for cells and systems related transmission projects are still doing design and assembly but have pointed them toward other companies that are making the components for them. The trend is broader than just the power train element of the business. As the Big 3 did in the 1990s, second tier systems suppliers to the auto industry are looking to place the capital burden further down the supply chain. This likely means more companies involved in the process; with smaller capital investments per company; and probably a greater total investment number.
The aerospace industry started 2018 off with a bang but the fourth quarter saw lower order numbers for the sector in each consecutive month. However, the backlogs in delivers for both Boeing and Airbus’s are a challange. Although Boeing has bought Embraer and Airbus’ acquisition of the Bombardier C-Series jet, it suggests that there is a possible opening for a new manufacturer or even the expansion of a key supplier’s portfolio to fill a gap that is forming in the regional/large format jet market. This is a supposition that Richard Aboulafia offered up in his November blog with a very reasonable scenario. Space programs are growing more commercial with three different private companies building platforms and more are likely to be formed. Though the government shutdown has put a hold on contracts concluded by the defense department, defense spending is projected to increase significantly over the next two years. R&D in the aerospace area and continued expansion of the domestic and export of fighter programs suggest growth in the program throughout 2020. The aerospace industry is poised for a strong 2019 in capital spending through out the supply chain.
The last two points will provide growth in the next couple of years but unfortunately government action — or inaction as it may be — will determine the strength of the growth. North America continues to “gray” as they say, and this will be a boon to the medical equipment market. The medical equipment industry’s capital spending is becoming an increasingly important market for our industry. For the first time, it became the third largest source of orders in a single month. The other area is off-highway and construction equipment. While our population has aged, our roads, bridges, and infrastructure elements are past gray and approaching decrepit. It is amazing something hasn’t been done yet as this is the single issue that both parties in Congress can find common ground. Some states have already begun working on projects that can no longer be put off. The situation will be an epidemic in the near future, which will require national attention that will drive hundreds of billions of dollars in new work. This will lead to a dramatic increase in demand for products in a sector that has already seen a significant rebound in 2018.
By the time that the orders placed in 2018 are finally in place on factory floors sometime in 2019, it is highly likely there will be a pause as manufacturers acclimate to the productivity that they have just put in place. In 1998, after a six-year run on growth in orders for manufacturing technology, many manufacturers came to realize that they had bought fewer machines, but the productivity of these machines was considerably more than they anticipated. Our industry endured a “pause” in orders even as manufacturing output continued to expand. This phenomenon was studied and reported by Dr. Joel Popkin in a paper released in 2000 titled, “Producing Prosperity – Manufacturing Technology’s Unmeasured Role in Economic Expansion.” The pause permitted manufacturers to “grow” into their new technology. The investments made in innovative technologies, more productive equipment, and significantly more automation will likely produce more than anticipated output. While manufacturers today are more aware of the technologies’ capabilities they have recently put on their floor, the value-add of automation is still a learning curve most manufacturers are climbing. As a result, there may be a pause in investment in the 2020–2021 timeframe. But it is likely to be a short one as the situations in significant customer industries will require additional tooling, capacity and new technology.
