U.S. industrial production in March beat forecasts with a 0.7 percent expansion on the strength of the mining and utilities sectors. It was the second consecutive month of industrial gains for the nation, following a February expansion that was twice as big as the previously measured 0.6 percent growth by the Federal Reserve.
February industrial output surged by a revised 1.2 percent on the strength of durable goods manufacturing and mining, according to the Fed. Expansion in the manufacturing sector, which accounts for three-quarters of total industrial production and 12 percent of the economy, was revised from the previous 0.9 percent estimate to 1.4 percent.
Manufacturing output continued to grow in March with a 0.5 percent rise, and the sector grew at an annualized rate of 1.7 percent in the first quarter. Analysts had forecast 0.5 percent increases for both manufacturing and overall industrial production for March. For the first quarter, industrial production grew 4.4 percent, just slightly below 4.8 percent in the fourth quarter of last year.
Industrial and manufacturing activity is expected to keep the nation’s first-quarter GDP afloat as other sectors of the economy, including consumer spending, construction, and job growth, slowly improve. Economists are predicting sub-2 percent GDP growth for the first three months of the year.
“There’s a lot of pent-up demand among consumers and businesses, and factories have to produce those goods,” Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities, told Bloomberg. “The outlook for the manufacturing sector has brightened and will continue to do so.”
Consumer goods production rose 0.7 percent in March, following 1.3 percent expansion the month before. Business equipment output was up 0.5 percent after a 2 percent February gain. The output of industrial equipment was unchanged from a 2.3 percent increase in the prior month, but the machinery subcategory declined 3 percent. After increasing 1.3 percent in February, fabricated metal products scaled back 0.1 percent.
After surging in February by 6.9 percent, automotive plants making vehicles and parts suffered a 0.8 percent decline. However, production in computers and electronics grew 1 percent, and appliances and electrical equipment gained 0.7 percent. Aerospace and transportation equipment stayed strong, accelerating to 1.5 percent growth from February’s 1.2 percent expansion.
In March, non-durables rebounded. Textiles jumped 2.5 percent, and clothing surged 3.3 percent. Paper improved from -1.9 percent in February to 1.1 percent, and petroleum and coal products similarly bounced back from -0.7 percent to 3.3 percent.
Lenders Anticipate More Equipment Buying, Financing
The equipment leasing and finance industry continues to display upbeat sentiments about business spending in the second quarter.
The March Monthly Confidence Index by the Equipment Leasing & Finance Foundation (MCI-EFI) rose nearly 2 points to 65.1, as respondents who said they believe business conditions will improve over the next four months jumped from 21.2 percent in February to 31.4 percent. The equipment leasing and finance industry, made up of banks, financial services companies, and independent leasing and finance companies, serves as a proxy for capital asset investment by companies.
The March index was the highest since 2012, surpassing January’s 64.9, indicating lenders are expecting businesses to loosen their purse strings for core capital goods investments, which have improved in 2014 but remain conservative.
“The overall economy is fair; however, I do see an increase in capital expenditures in 2014,” said Elaine Temple, president of Bancorpsouth Equipment Finance, a middle-ticket lender that finances equipment purchases between $250,000 and $5 million.
In March, there was a sizable positive shift in business expectations, as far fewer lenders believed conditions will worsen over the next months, dropping from 6.1 percent to 2.9 percent. The 10-point surge among those who said business conditions will improve also impacted the percentage of those who feel conditions will remain the same, from 72.7 percent to 65.7 percent.
While finance executives felt more positive about lending conditions, they were less enthusiastic about the short-term economy. Although more executives said in March that the economy is in “excellent” shape (up 3 percent to 5.7 percent), fewer believed economic conditions will get better over the next six months (down 3 percent to 31.4 percent). Instead, more of them now expect the economy to flatten out into the third quarter.
Expectations of greater demand for leases and loans for capital expenditures were in line with those of business conditions. The number of respondents who said financing demand will increase over the next four months rose from 24.2 to 31.4 percent. Those who said demand will decrease fell 0.4 points to 5.7 percent.
Access to capital remained a non-issue in March. No respondents said there will be less access to capital, meaning all executives expected either the same or better access over the next four months.
Metal Cutting, Forming Machinery Sales Soft
Investments in metal cutting and metal fabrication machinery by the metalworking industries remained weak in February, declining 6.6 percent from the prior month, according to The Association For Manufacturing Technology‘s (AMT) monthly report.
Total machinery investments in February were $354.4 million in the United States Manufacturing Technology Orders (USMTO) report put out by AMT. The February erosion in machinery orders was nowhere as deep as January’s 25.2 percent plunge due to an unexpectedly robust December 2013. Orders for machine tools and forming machines had risen for five straight months before the start of the year.
With a year-to-date total of $733.82 million, down 0.6 percent year over year, Doug Woods, AMT’s president, said a soft first quarter will not be unexpected, as it was affected by tough winter conditions. The soft February USMTO figures are consistent with the month’s factory orders data from the Department of Commerce, which reported a 4.9 percent drop in metalworking machinery orders.
Through the first two months of the year, the Northeast region has been the most robust, with machinery sales up a huge 41.8 percent year over year. February orders for the region were up 14.3 percent over the same month in 2013. The West Coast has similarly been on an upturn, as year-to-date sales have outpaced the same period last year by 39.1 percent.
Even though metalworking manufacturers have slowed down their machinery purchases, they continue to churn out production. Last week, the monthly cutting tool sales report for February produced by AMT and the U.S. Cutting Tool Institute showed only a slight drop in orders. A metal-cutting consumable, cutting tools make a good representation of production activity.
Another positive sign ahead is that many machine shops are operating on old equipment and in need of upgrades, while conditions for machinery financing remain good for buyers. “With the average age of capital equipment at almost 22 years and interest rates continuing to stay low, the environment is ripe for investment in manufacturing technology,” Woods noted.
A good portion of that investment is expected to come after the biennial International Manufacturing Technology Show (IMTS) in Chicago in September. Manufacturers attend IMTS to see the latest in machinery and production equipment.