Contech USA


Where Did All the Money for New Machines Go?

December 3rd, 2015

Last year United States manufacturing companies said they planned to invest heavily—very heavily—in machine tools and related manufacturing technology in 2015. In fact, a survey of equipment buyers had initially predicted an increase of 37 percent in spending over levels the year before, and for good reason.   According to the U.S. Federal Reserve, capacity utilization at auto parts manufacturers was at 88 percent in July—the highest level in 25 years.

This high rate of capacity utilization reflects the fact that automakers are busier than they have been in years. More models, higher vehicle sales and production, stepped-up marketing, and easy-to-get below-prime car loans are some reasons car and truck sales are up.  The staggering number of new car models set to begin production in the next few years means a lot more plastic injection molding capacity is needed. Also, the complexity of molds is increasing as automakers design distinctive features into bumpers, taillights and other plastic parts.

Airplane builders have booked record numbers of orders. Aerospace orders were up a whopping 387 percent in July. After years of declining ridership, airlines need to buy more planes that are fuel efficient and comfortable for travelers. Medical companies are scrambling to keep pace with an aging population here and abroad. People are getting older and as they do, knees, hips and backbones are wearing out.

Gas and oil are now plentiful in our own backyard, and we are intent on extracting these resources cleanly and committed to using them in an environmentally responsible way. But the United States lacks the infrastructure, whether pipelines or rail cars, to move the fuel to where it can be used or exported. Major investments are being made to correct that.  Re-shoring and near-shoring are trends that are picking up momentum. Having production facilities and factories close by is proving to be a smart strategy again.

With all of that optimism one could see why everyone was getting excited… so, what the heck happened? 

The equipment used by many U.S. manufacturers is getting creaky. Even as economic indicators rise, domestic capital spending has remained low by historical standards, especially in manufacturing.  In contrast, companies have spent heavily on acquisitions and stock buybacks. That choice could hobble efforts by U.S. firms to compete more effectively with foreign rivals in the years ahead.

The average age of industrial equipment in the U.S. has risen above 10 years, the highest since 1938, economists at Morgan Stanley said in a recent report.  The growth of all types of capital spending by U.S. firms grew just 3% last year, far below the long-term average of more than 8%, Morgan Stanley says. The firm sees only modest improvement ahead: 3.8% growth this year and 5.3% in 2015.  Factory equipment can be less exciting than acquisitions. The Association for Manufacturing Technology reported that U.S. orders for machine tools and other equipment used to shape metals and other raw materials into products in the first half were down 2.7% from a year earlier. Pat McGibbon, a vice president at the association, cites uncertainty over interest rates, the economy and taxes.  One big unknown is whether Congress will restore so-called bonus depreciation, which allows companies to write off new equipment faster, cutting their tax bills and making capital spending more tempting

Another factor may be that global companies in recent years have concentrated much of their investment in fast-growing parts of Asia and Latin America rather than in the U.S. and Europe.

Some big manufacturers are reducing capital spending this year. For instance, Caterpillar Inc.s capital spending fell to $710 million in this year’s first half from $1.39 billion a year earlier. The company’s chief executive, Doug Oberhelman, told analysts in July that Caterpillar had invested heavily in recent years and “so we’re in pretty good shape with all that.” Meanwhile, the company is ramping up share buybacks

Turmoil in the Middle East, Ukraine and elsewhere may make some firms even more hesitant to invest in equipment. David Farr, chief executive of Emerson Electric Co. , told analysts in early August that jitters were hurting sales of his company’s products, which include factory automation equipment. “The geopolitical situations are probably some of the worst I’ve ever seen,” said Mr. Farr. “The world’s talking about negative things.

Despite the negatives, Daniel Meckstroth, chief economist at the Manufacturers Alliance for Productivity and Innovation, a research organization, expects an upswing in capital spending. For one thing, he says, old equipment can be nursed only so long before it has to be replaced: “We’ve postponed investment for so long that it almost has to occur.” For another, many of the CEOs making acquisitions will find that they need to make capital investments that previous owners deferred.

It sounds like 2016 is going to be the year of the industrial machine, so whether you presently own a machine that is reaching the end of its life cycle and is ready to retire, or you have an application that requires a brand new custom machine built especially for the process, Contech can help!  As a matter of fact if you would like to jump on the Build a Machine Bandwagon, we are offering 5% off of our standard line of equipment from now until the 23rd of December 2015, and as a Holiday thank you, we will cover the cost of crating, which in some circumstances will save you approximately $1,000.00!  If your not quite ready yet, don’t worry, we will be here when you are.


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