February MBI at 52.5 – Growth Slows Significantly

With a reading of 52.5, the MBI signaled that the pace of growth in the metalworking industry slowed considerably in February. Four of the subindices (new orders, production, employment and backlog) were significant contributors to the slowing growth. New orders and production both showed solid growth in February, but the rate of growth was much slower than January. Also, employment continued to show some growth, but the growth was fairly mild.

However, backlogs contracted for the first time since September 2009. The fall in backlogs was extremely sharp, and although the fall is not unprecedented, the trend is similar to the fall in backlogs in the fall of 2008. Given the overcapacity in manufacturing, it will be hard for the metalworking industry to maintain significant backlogs. Overcapacity is putting pressure on the prices received by metalworking facilities, too. This problem is compounded by the rapid growth in the material prices subindex since July 2009.

Two of the subindices (exports and supplier deliveries) remained virtually unchanged. The export subindex has indicated contraction in all but a couple of months since December 2008. I expect this to continue as most countries attempt to devalue their currency to boost exports. (It’s hard to devalue your currency more than others when you are the world’s reserve currency.) Also, the Euro continues to face significant headwinds from debt levels in Greece, Spain, Portugal and Ireland.

Even though the MBI showed slowing growth, future business expectations are still near the all-time highs. However, the trend seems to indicate that future business expectations are beginning to deteriorate. Even as confidence about the future starts to wane, respondents to the survey indicated that their plants will spend more on metalworking equipment in the next 12 months.