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VIDEO: Data Analyst Gives Insight on Contraction in the Precision Machining Sector

20. November 2019

Chris Felix, Editor-in Chief of Production Machining: Hi, Chris Felix here, Production Machining editor-in-chief. I'm here with Michael Guckes, chief economist and director of analytics for Gardner Intelligence. We're going to talk about the current numbers for the Precision Machining Index. After the longest expansion in recorded history from November 2016 to June 2019. We've seen three consecutive months of contracting business conditions, with October's reading at 46.1. This month’s reading is actually higher than last month. Why do you call it a contractionary reading?

Michael Guckes, Chief Economist and Director of Analytics for Gardner Intelligence: That's a great question, Chris, and that's one of the things that we try to explain in the index. All values that are below 50 represent a contraction in business activity. Now, when we have a month like September, which was below the October reading, what it means is that business activity was contracting faster than it was in October. And so when the numbers are on an increasing trend, but still below 50, what it tells us is that conditions are still slowing, but not as quickly as they were in prior months.

Chris Felix: So I know the index is an average of six components. Tell me about what's happening with those six components.

Michael Guckes: That's a great question. So we have six components. The ones that are leading the index right now include production and especially supplier deliveries. Supplier deliveries has been really strong for the last 18 months. It's been one of the leading components of the index. Unfortunately, some of the components have really bifurcated from the others and really that includes backlogs and exports. What we've seen in the last several months is that in order to maintain production levels where they have been in the recent past, we're seeing a lot of precision machinists have to resort to dwindling down their backlogs in order to level set production. And part of the issue there is simply [that] new orders aren't as strong as they used to be. And so when you look at our index numbers, you'll see that there's a pretty reasonable gap between new orders and production results in the last several months. And so that's really been influencing backlogs.

Chris Felix: Michael, do the recent weak readings mean the entire PM world is contracting?

Michael Guckes: Not at all, Chris. What we're seeing is that, by end market, for example, we're seeing that aerospace continues to do very well. Aerospace has really been on a tear in the last 18 months or even longer. But we are seeing some weakness in other important industries. And automotive, unfortunately, is one of those where we've seen a strong contraction in automotive activity among precision machinists in the last, say, nine months.

Chris Felix: What else is your data telling you about business conditions for production machinists?

Michael Guckes: Not everybody knows that we track information about prices received — so, that's a function of your pricing power —  also, material prices, which we use as a proxy for input costs being experienced by production machinists. We also look at business sentiment and one of the things that we have found through talking to different production machinists over time is that they're very interested in pricing power, the ability to push through price, higher prices. So what our data has shown us in terms of pricing power through prices received is that in 2018 we had a very large increase in the ability of firms to pass through higher prices. And as you might expect, we've seen pricing power has come down a lot. It has not moved into contraction territory, but we have seen it fall substantially.

Chris Felix: Well, Michael, thanks for meeting with me today. For more information about business trends and activity, please visit gardnerintelligence.com, and of course for precision machining needs, visit productionmachining.com.

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