New orders for manufacturing technology exploded out of COVID. Now it’s T&W’s turn.
Despite a slight dip from historic highs for new orders in manufacturing technology (MT) equipment and some uncertain economic trends, 2023 is shaping up to be a banner year for cutting tools and workholding devices.
There are several reasons for the optimistic outlook. For starters, the so-called down year for MT is actually extremely robust—it just doesn’t quite measure up to the record-setting 2021 and 2022 levels, according to the U.S. Manufacturing Technology Orders (USMTO) report released in April by McLean, Va.-based AMT – The Association for Manufacturing Technology.
Through the first two months of 2023, MT orders totaled $819.6 million (down 10.7% from like-2022). But February’s tally was still the third-best on record for the month, AMT said, and nearly 50% above the average value for February.
“Although many had anticipated a recession to take hold at the beginning of 2023, we are not yet seeing that in the data, and while declining somewhat, manufacturing technology orders remain at a historically elevated level,” AMT President Douglas Woods said at the time. Moreover, he added, “surveys of manufacturers show a broadly positive outlook for business conditions over the next 12 months,” even in the wake of fears of tightening credit conditions and Silicon Valley Bank’s failure in early March.
The news for tooling and workholding (T&W) is even more upbeat. That’s because AMT tracks MT data when orders are made, while T&W isn’t counted until products have been shipped—and there can be a considerable lag between the two events. As a result, the record MT years in 2021-22 are just starting to take hold for T&W.
For example, cutting tool consumption surged 10.8% in 2022, despite slipping in November and December. And deliveries climbed to $196.2 million in January, up 4% from the previous month and 23% from January 2022, according to AMT and the U.S. Cutting Tool Institute’s (USCTI) monthly report. The data, which is based on totals reported by participating companies, is said to represent the majority of the U.S. market for cutting tools.
“The outlook remains strong for 2023; cutting tool suppliers continue to reduce back orders and increase inventory,” said Jack Burley, chairman of AMT’s Cutting Tool Product Group and Committee. “Modest increases in the data can be attributed to inflation, but incoming new order activity remains at a good level,” he noted, adding that 2023 should “meet expectations.”
Employment and other indicators also continue to trend well. “In January, the U.S. labor market had its best month in job hirings since 1969, and cutting tool sales remained steady,” USCTI President Jeff Major remarked in a release. “The consensus is that the cutting tool industry looks positive for at least the first six months of this year.”
The threat of a full-fledged recession seems to have largely subsided after rising concerns in 2022. But it’s far from smooth sailing.
“Economic pressures still exist, and the Federal Reserve continues to raise interest rates to stave off inflation,” USCTI’s Major pointed out earlier this year. To this end, the benchmark federal funds rate reached a 16-year high when the Fed announced another 25-basis-point hike on March 22, slowing year-over-year inflation to 6% (which was still well above the preferred 2%). But even within the Fed there’s a lot of debate on the best course of action and what the ultimate effect of raising interest rates will have—and how long they’ll take to make an impact.
There are also many uncertainties and unknowns, said Chris Chidzik, AMT’s principal economist. The list includes global geopolitical issues such as Russia’s invasion of Ukraine, the lingering effects of COVID-19, trade wars, supply chain disruptions, and government policies. Fights over the debt ceiling limit, for example, could have a dramatic impact if an agreement isn’t reached: The Treasury may run out of borrowing power by about mid-August and cause a protracted government shutdown and a significant increase in unemployment through 2024.
While that’s a worst-case scenario, Chidzik said it’s something manufacturers are watching closely. More likely, he noted, is some sort of compromise because “no one wants to be responsible for a recession during an election year.”
But it often comes down to consumer confidence or the lack thereof, even when the underlying economic conditions are strong. “The question is whether we will scare ourselves into a recession,” Chidzik cautioned. “If you’re expecting one to come, you’re probably not going to remodel your bathroom or buy something extravagant.”
For now, however, the overall mood in the manufacturing industry is positive. “It may be anecdotal, but everyone I talk to seems pretty optimistic,” Chidzik continued. “One job shop guy told me, ‘If it wasn’t for the news, I wouldn’t even think about a recession because the orders keep coming in.’”
AMT also discounts the notion of a “rolling recession” that selectively affects certain portions of the economy while others remain buoyant. “We call that normal business conditions,” Chidzik quipped. “Prior to 2020, if you look at the breakdown of USMTO orders, there are always some industries going up while others are heading down. They all have their own cyclical nature. Some of them, like construction, are very weather dependent.”
And, Chidzik said, any comparisons to the 2001 recession or global financial crisis (GFC) of 2007-2009 are unwarranted at this point. “I don’t think we’re where we were in 2007-2008. At that point, all the banks were carrying mortgage-backed securities, derivatives, and credit default swaps, so once the underlying housing market started to be devalued or defaulted on that trickled throughout the financial system. And there were so many interconnecting ownerships between different financial institutions. In this case, the underlying asset (regarding recent bank failures) are U.S. Treasury securities and, debt ceiling issues aside, nobody’s questioning that U.S. Treasuries are a good asset.”
Moreover, USMTO machinery orders have performed much stronger coming out of COVID than they did after the previous two downturns (see chart on previous page). Peak output more than doubled this time around, while orders plunged in the two years following the earlier events.
So, while Chidzik isn’t ready to say that we’re completely out of danger of a recession, he’s confident that if it happens it will only be a mild one—and that manufacturing will remain robust. “As long as the machinery orders that are on the books are delivered, the industry is still in a very good position on the cutting tool and workholding side.”
The big winners thus far this year have been OEMs and industry-specific suppliers, while job shops saw a slight drop in activity in early 2023 compared with a year earlier, according to AMT’s USMTO report for February. In particular, it noted, the automotive sector, fabricated metal products manufacturers, and railroad, ship, and other transportation manufacturers significantly increased their orders in February.
Moving forward, aerospace and defense (A&D) holds the most promise. “It’s going to be really interesting over the next year or two,” Chidzik said, noting that A&D was the only industry that AMT tracks that increased orders in both 2021 and 2022—and it still wasn’t back to 2019 levels. Growth is expected on both the commercial and defense side of aerospace, he said, pointing to the need to replace aircraft and equipment sent abroad and the expected growth of commercial satellites.
In December, United Airlines announced what it touted as the largest wide-body order by a U.S. carrier in commercial aviation history: 100 Boeing 787 Dreamliners with options to purchase 100 more. United aims to take delivery of the planes between 2024 and 2032; it also exercised options to purchase 44 Boeing 737 MAX aircraft for delivery by 2026 and ordered 56 more MAX aircraft for delivery by 2028.
The construction and mining machinery manufacturing sectors also are poised for growth. AMT pointed to the new pipeline infrastructure that is scheduled to come online in the Permian Basin (a sedimentary mid-continent oil field province in the southeastern United States), that is expected to result in “increased production levels and an uptick in manufacturing technology orders from oil and natural gas mining machinery manufacturers.” In addition, the U.S. Department of Energy announced plans to support the development of domestic sources of lithium, AMT said.
Construction and mining and other sectors also stand to benefit from the passing of two significant bills last year: the CHIPS Act and the Infrastructure Investment and Jobs Act. While government-funded projects stemming from the legislation may take time to come to fruition, they also are less susceptible to an economic downturn.
Supply chain issues continue to be challenging. This includes the semiconductor chip shortage, at least in the near term, and raw materials sourcing. Although concerns have lessened in recent months, manufacturers have had problems obtaining key machining materials such as nickel and other metals since the start of the war in Ukraine, which slows the need for additional tooling and workholding.
On the plus side, the rampant parts and materials shortages coming out of COVID has forced companies to rethink their supply chain strategies. “During 2021 and 2022, machine orders were increasing by leaps and bounds above what we had expected, particularly in industries that had been moving overseas for a while,” Chidzik explained. “A lot of domestic manufacturers realized they needed a source—and more likely multiple ones—either domestically or within North America that they can quickly access to provide more options if an emergency arises.”
This has been one of the biggest lessons that manufacturers have learned from the pandemic, Chidzik said. But, he noted, reshoring isn’t practical in some cases, such as castings and other goods that would be too costly or burdensome to bring back home. Castings, which are mainly sourced from Asia and, to a lesser extent, Europe, are almost exclusively imported due to restrictions by the U.S. Environmental Protection Agency.
When reshoring or nearshoring isn’t possible, companies are increasingly turning to another option: “friendshoring.” Also known as allyshoring, the practice allows manufacturers to reduce some potential geopolitical risks while still tapping into international resources in western Europe, South America, and other friendly regions.
Regardless of location, companies of all sizes are plagued by the global labor shortage and skills gap. “It isn’t a unique problem for manufacturing.
Everybody is having trouble hiring people,” Chidzik said. “On the bright side, manufacturing is primed to add automation when there are labor challenges.”
While the rate of automation escalates during most downturns, Chidzik sees a major difference this time around. “We’re seeing a lot more smaller- and medium-sized shops adopting automation, whereas in the past it was generally reserved for larger manufacturers,” he said, attributing the growth in part to a greater familiarity, acceptance, and access to such technologies. “If you wanted a robot in the past, you almost had to have a computer programmer on staff. Now a lot of firms use their own software and design interfaces that allow users to specify different tasks without complicated programming.”
Flexibility is key. Multi-axis machines help improve productivity by consolidating tasks, which Chidzik believes will lead to further automation.
The trend has already started, according to the January USMTO report, which said “there has been a significant increase in orders for machining centers with simultaneous five-axis capability to produce more complex parts” since early 2022. While Chidzik still sees traditional machines having a valuable role, he expects a “rebalancing of who orders what.”
The same could be said for the overall machine technology industry, as well as tooling and workholding. “After the historic run of orders placed in the last two years, a mild slowdown in new orders could help to reduce the current backlog and put the manufacturing technology industry in a position to deliver machinery with much shorter lead times when economic activity is anticipated to pick up later in the year,” AMT’s Woods said in March.
Burley was even more optimistic: “The cutting tool industry continues to gain steam. If the positive trajectory in U.S. cutting tool consumption continues, monthly order totals will be at or higher than pre-pandemic levels before the end of the year.”
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