Machine tool orders fell 24.9% in January

Largest drop since July suggests sector is weak

March 11, 2003|By Gus G. Sentementes | Gus G. Sentementes,SUN STAFF

War worries, weakened demand, and plenty of existing production capacity kept manufacturers from spending on new equipment in January as machine tool orders dived 24.9 percent from the previous month - the largest drop since July.

Spending on new orders for machine tools fell to $149.7 million in January, compared with $199.4 million in December. Total orders were down 19 percent for the month compared with $184.7 million in January 2002, according to a report yesterday from the American Machine Tool Distributors' Association and the Association for Manufacturing Technology.

Economists see spending on new machine tools - equipment used mainly on factory floors for manufacturing - as a reliable, albeit volatile, indicator of the overall health of the U.S. manufacturing sector. Some said yesterday that continued weak sales in the machine tool sector mean domestic manufacturers remain many months away from a recovery.

The report follows the release of other key economic indicators this month that, when taken together, paint a picture of a struggling manufacturing sector. In January, consumers cut spending on "durable" goods, such as cars and refrigerators, by 5.7 percent, the biggest drop since February 1990. And manufacturers shed jobs for the 31st consecutive month, cutting 53,000 in February, according to the Labor Department.

The manufacturing sector's "recovery has been prolonged toward the end of this year to the first half of next year," said Kenneth E. Jackman, an associate economist with Economy.com in West Chester, Pa., who focuses on industrial machinery.

Jackman said U.S. manufacturing firms are operating at 73 percent of capacity. Three years ago, they were running at 82 percent, he said.

"There's a lot of extra capacity there," he said. "If their orders pick up quickly, they can just jump right in without needing new machinery. ... With so much excess capacity, that capacity will be eaten up first before we start seeing new machine orders."

Manufacturers' production capacity was built up in the 1990s as companies spent more to modernize equipment in search of greater efficiencies, analysts said.

"To some extent, some of the current weakness we see in orders is a function of having spent a lot and over-invested in the 1990s," said Thomas F. Carpenter, chief economist for ASB Capital Management in Washington. "It's also a function of companies looking out at the geopolitical change and wondering what business is going to be."

Carpenter said that investors, consumers, and businesses will have to adjust and live with uncertainties generated by domestic and international political and military turmoil.

"One of the things everyone on Main Street and Wall Street is going to have to realize is that we're going to have a sequence of military conflicts to deal with over the next 10 to 20 years," Carpenter said.

"It's pretty straightforward," said Mark Vitner, senior economist at Wachovia Securities in Charlotte, N.C. "With the U.S. likely headed to war, a lot of businesses have put off decisions on buying new equipment, building new factories, carrying any inventory, or hiring any more workers. In that kind of environment, the recovery is beginning to languish a little bit, and the consumer is just about tapped out."

Yesterday's report from the two manufacturing associations, which survey more than 300 members, showed significant declines in the Northeast (-37.9 percent) and West (-50.2 percent).

In the Southern region, which includes Maryland, tool consumption slumped 27.5 percent in January from the previous month, but was still 38.7 percent higher than the previous January.

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