ASSET MANAGEMENT NEWSSpecial Edition, January 2019
Equipment Market TrendsWelcome to this special edition of the Alta Asset Management Newsletter. You will find some of the market changes are obvious while others are subtle. As we enter 2019, this will serve to backstop my What’s Hot and What’s Not in Equipment Leasing for 2019 that will be published by the ELFA in February.
Scores range from a possible:
Please let me know if we can assist with any appraisal or remarketing needs in the year ahead.
On behalf of the Staff and Management of The Alta Group, LLC, I wish you a terrific 2019.
The overview follows.
Best regards,
Carl
Carl Chrappa, A.S.A., M.R.I.C.S., I.F.A.
Senior Managing Director – Asset Management Practice Leader
This market is mixed with new equipment sales increasing smartly in 2018, but expected to rise at a slower rate in 2019. For 2018, new combine sales increased by over 15%, 4WD tractors by over 10%, and 2WD tractors by over 5%. Overall, new equipment deal ers are optimistic, since the replacement market is expected to continue through this year. Used equipment prices for Retail/Auction also increased by around 4-5% for the year. The number of U.S. farms is declining, while their size is increasing. Farmland prices are down slightly. But a very high portion is paid in full. This gives farmers staying power if they need it. Sales of new combines and high horsepower tractors are expected to grow but at a lower rate in 2019. Farm incomes declined in 2018 and farm bankruptcies increased at a rate of twice 2014. Farms generating $1 mil. or more in annual revenue represent just 4% of the U.S. total, but two-thirds of the country’s ag commodities. In the commodity area, soybeans, corn and wheat all declined for the year, with soybean exports to China suffering the most.
AIRCRAFT
COMMERCIAL
Wide-body aircraft remain out of favor as production increas es continue to be driven by narrow-bodies, in particular the Boeing 737 and Airbus A320. For 2018, Boeing delivered 806 aircraft, a record. Airbus reported deliveries of 800 planes, also a record. Lower fuel prices have extended the lives of older aircraft. This may change if prices rise. Regional airlines continued to pull down their turboprops and small regional jets. Forecasts for global airline profits in 2018 have been revised down ward from $33.8 billion to $32.3 billion (down from the record $37.7 billion in 2017) due to rising fuel and labor costs. N.A. airline profit forecasts have also been revised downward from $15.0 billion to $14.7 billion (down from $18.7 billion in 2017).
CORPORATE
We have seen a sharp increase in business aircraft appraisals and inspections with some aircraft as old as 40 years. Compared to last year, business jets and turboprops have seen a slight decline in sale transactions (-1.6% and -0.9% respectively). The trend toward falling fleet ‘For Sale’ percentages has continued, with business jets dropping to 8.9% (down from 10.4% in 2017) and turboprops falling to 6.8% (down from 7.4%). Jets and turboprops are taking less time to sell (both -27 days), respectively averaging 285 days and 287 days on the market. Small and large jets have seen increases in price YTD (+7.0% and +5.3% respectively), while medium jets and turboprops have declined (-1.5% and -2.3%).
HELICOPTERS
The helicopter market continues to struggle toward recovery as conditions improve a bit in the oil patch. There was a 21-month low in sales transactions in early 2017, since then there has been a slow but continuous recovery through mid-2018. However, the next 5 months showed a decline of -8.5%. Piston rotorcraft deliveries through 3Q increased by 15.8% (to 220 units) while turbine deliveries increased 8.3% (to 510 units). YTD pre-owned sale transactions are down for turbine (-6.3%) and piston (-12.0%) helicopters.
AUTOMOBILES
Total U.S. automobile sales in 2018 were 17.33 mil., almost identical (+0.5%) to last year’s 17.24 mil. This in spite of rising interest rates and declining customer incentives. The light truck to car sales ratio is almost 70/30;
remarkable. The average car is now 10.5 years old and average cost of a new car is around $37,000. Year-over-year (y/y), used wholesale prices declined by just under 2% with the most desirable types being the compact pickup +4.1%, and full-size car +5.7%, and least desirable being the mini-van -8.2%, and luxury SUV/CUV -4.8%. For the year, retail used car sales increased by approximately 4%, with the average price of about $22,000. A slowing economy and increasing interest rates will negatively impact this segment. Sales of new cars are expected to decline in line with the economy and other global auto manufacturers.
CHEMICAL/PROCESSING
The process equipment segment continues to grow, with increased sales and prices for new equipment averaging about 8% year over year (y/y). The overall CPI operating rate is 76.9%. However, refiners operated at 89.2% of their capacity to meet demand. U.S. chemical production is expected to rise by 3.6% in 2019 following a 3.1% increase this year. Major capex expansions have commenced as chemical makers have committed to the building of 333 new chemical plants over 10 years, 40% still being in the planning stage. Residual valuations for this type of process equipment are commonly performed using an in-Place, or in-Continued Use Premise of Value, with retail and wholesale in-Exchange sales prices often being much lower due to custom design process characteristics along with high-process engineering and installation costs.
COMPUTERS
After fourteen consecutive quarters of decline, global shipments grew 1.4% in the second quarter of 2018, and were flat in the third quarter (-0.7%), but fell sharply in the fourth quarter (-4.7%) to finish down 1.3% for 2018. In 2017, shipments had fallen 1.4% in the fourth quarter, 3.6% in the third quarter, 4.3% in 2Q and 2.4% in 1Q. Top global brands by market share for the first three quarters include: Lenovo (21%), knocking HP (20.7%) out of first place into a close second, followed by Dell, Apple, and Acer. Based on preliminary data, global server shipments grew more than 15% in 2018, and revenues grew more than 30%, with growth expected to continue into 2019, spurred primarily by an ongoing enterprise refresh cycle and continued demand from cloud service providers. Dell EMC (18.2%) surged ahead of HPE (13.1%) in market share, with all others trailing far behind (<7%). Intel introduced its new Optane DC persistent memory to be released for general availability in the first half of 2019. Unlike traditional DRAM, Intel’s new technology will offer the advanced combination of high-capacity, high speed, afforda bility and persistence. OEMs and CSPs have announced beta services and systems for early customer trials. Used computer sales are being pummeled by chrome books (the “almost” PCs) and phablets; business as usual in this market. As one would expect, laptops bring better prices than desktops and sell quicker.
CONSTRUCTION
According to the U.S. Census Bureau, construction spending increased 5% from 2017. The U.S. construction equipment market is currently experien cing an upturn, largely driven by the strong economy and the rise in the rental segment. The percentage of sales from rental has risen from 35% at the beginning of the decade to more than 55% today. According to Top Bid, U.S. used construction equipment auction 12-month price trends of the Top 10 models by type were mixed. Trending positive were wheel loaders, track loaders, scrapers, and tractors. Trending negative were compaction equipment, crawler tractors, and trenchers. Overall, used equipment prices increased by around 6%, with volumes generally down due to hot market conditions. Sales of heavy equipment are expected to decline in 2019, after increasing by over 13% in 2018. Construc tion work backlogs broke a record in 2018 at 9.9 months, with infrastructure at 10.1 months. For 2018, total dollar value of new construction starts increased by over 14% for residential, 2.5% for non-residential, and for non-building (civil works) over 90%. The total increase for all construction starts was over 30%.
CONTAINERS
The ISO marine container industry is continuing to improve along with global containerized trade. Marine cargo and container throughput at ports increased by 4.0% in 2018. Prices for new 20 ft. containers have increased by approximately $600 from 2016 levels. Thus far tariffs haven’t hurt containerized trade. U.S. intermodal traffic increased to record levels. For 2018 approx. 3.3 mil TEUs were manufactured, a slight decline from 2017. The average age remains high as 2003 – 2008 containers are now coming up for sale. In addition, ISO reefer container production is expected to increase this year. Also, the sales of domestic 53 ft. intermodal containers are expected to increase from around 21,000 in 2018. The chassis market remains very good.
FOOD PROCESSING/PACKAGING
The food processing and restaurant equipment industry continues to prosper in a strong economy buoyed by low unemployment and high consumer confidence. Pizza leads all restaurant categories with sales increasing by 7%, followed by casual dining at just +5% and quick service at 4.5% for the year. Good used equipment categories include: ovens; stoves; mixers; slicers; rotisserie ovens; and dish washers. Not so good include: large walk-ins; deep fat fryers; and some display cases. For the food processing category, sales are good for packaging & labeling equipment, fillers, cappers, extruders, grinders, formers, SS bins, etc. Most of this equipment has long useful lives.
MACHINE TOOLS
U.S. metal cutting tool consumption increased 12.9% YTD in late 2018, based on preliminary information which includes the largest August order level in the USMTO program’s history. Gardner’s Metalworking Index was 54.7 in November, the 23rd consecutive month of expansion. Growth is forecast to slow and possibly decline in 2019. The automobile and machinery/equipment industries are expected to spend only $1 billion each on machine tools in 2019, with job shops spending about $2.2 billion. These top three will account for 60% of machine tool consumption. December marked the 28th consecutive month the ISM’s Purchasing Managers’ Index (PMI) scored above 50, indica ting continued manufacturing expansion. According to a recent survey, at least 1/3 of all 2019 machine tool spending is planned for horizontal and vertical machining centers, but turning equipment will see
the highest growth rate, especially horizontal lathes with 10-inch (or smaller) chucks. Also, used CNC vertical and horizontal machining centers are in great demand. In the primary market, desirable brands include: Mazak; Mori Seiki (now DMG Mori); Okuma; Haas; and the like. Auction prices for desirable but older CNC turning and machining centers have been up by 20%+ compared to 2017. Early 2000s and older machinery are difficult to sell.
MARINE
BLUE WATER
Sales and purchases have cooled to about 90% of the record-breaking numbers set in 2017. Scrappings are down for bulkers as average secondhand values inched up +2.9% y/y, while tankers have seen scrappings intensify and values increase by +5.5%. Container shipping volumes have been a bit weaker than anticipated, however the retirement of a number of ships has preserved the value of prime age vessels. Container ship earnings improved by 25% for the year. Consolidation of commercial control lers is a reason to be optimistic for a sustainable recovery in freight rates while the end of year collapse in oil prices provided some relief for operators by lowering bunker prices. The developing trade war between China and the U.S. threatens to disrupt further recovery.
INTERCOASTAL
Oil prices fell by about 40% from October to the end of 2018, thus offshore continues to struggle. The bulk of demand has shifted toward boats that are less than ten years old. AHTSs and PSVs are heavily discounted by half to two-thirds of previous highs. Inland tank barges are presently seeing good demand as they benefit from increased U.S. petroleum production and pipeline bottlenecks. Recent increases in coal exports, frac sand transport, and grain have revived demand for hopper barges. Barges are seeing price increases due to the rising cost of steel, which offers some support for residual values. Shipdocking tugs and newer costal/ocean tugs are in high demand. Older tugs are being removed from petroleum transport and are seeing price declines up to 25%. Also, subchapter M is causing the retirement of many pushboats. Good news for newer vessels. It will take time to reduce the excess capacity.
MEDICAL
Sales for almost all imaging modalities increased slightly in the U.S. while growing worldwide. Emergence of the Smart Hospital is also hot, from integrated hospital operations to increasing connectivity between healthcare services (hospitals, clinics, am bulances) and between patients & professionals. This includes the use of artificial intelligence in diagnostics and treatment plans. In late 2017, Butterfly Network of Con necticut won FDA clearance and introduced its Butterfly iQ portable ultrasound system. It consists of a portable transducer that connects directly to an iPhone, and an iOS app to display the images and to control settings. It allows each practitioner to carry an ultrasound in their pocket and costs under $2,000. Previous hand-held ultrasounds have been priced at more than $10,000. Butterfly commenced shipping the iQ dev ice in September 2018 and expects to have thousands of units in the field by year-end.
Global diagnostic imaging sales are expected to be up just over 5% in 2018, with CTs accounting for the most growth (5.6%). These sales are forecast to grow around 5.3% in 2019, again led by CTs with 5.8% growth. Healthcare spending in the United States is projected to surpass $3.67 trillion in 2018, an increase of 5.3%. As a percentage of GDP, healthcare spending is expected to expand from 18% in 2016 to nearly 20% by 2026. About 32% of this represents hospital care. Global healthcare devices sales are estimated to increase 6.4% annually through 2020, reaching nearly $440 billion. Total hospital spending increased 4.6% in 2016 and 2.9% in 2017, but capex spending for 2016 and 2017 was flat, and for 2018 looks to be flat again.
MINING
Higher metals prices and improved margins since 2016 have spurred producers to expand exploration work for the second year in a row. Budgets are up 19% as spending is estimated to have reached nearly $10B for 2018, driven in part by the forecasted boom in demand for copper and metals used in electric vehicle batteries. Iron ore prices have slumped due to weak demand from China. Copper, aluminum, lead, nickel, zinc and PMs (except Palladium) are all down. Total U.S. coal production for the year was about 750.4 mmst, 2.8% lower than 2017. By year’s end Appalachian coal prices had increased 43.4% and weekly production slipped back to 3.0 mmst after spen ding most of the year in the range of 3.8-4.0 mmst/week. PRB coal prices have been relatively stable (YTD down by -2.9%). Increasing adoption of smart technologies is expected to drive equipment prices going forward. The strengthening dollar, contentious international trade relations and a cooling Chinese economy remain as headwinds.
OIL/GAS
Most of 2018 was a strong year for oil and gas. Over the past year the U.S. Rotary Rig Count has increased by 16%, but was muted in the 4th quarter of 2018 as oil prices slid by about 40% from October highs. In addition, there are currently 7,622 uncompleted wells in reserve. Drilling rig prices have increased 5% - 10% y/y. Best prices are for drill ratings of 15,000- to 20,000-ft. Approximately 88% of wells are drilled horizontally, with the remaining spilt between directional and vertical. Additionally, increased fracking caused a sharp rise in demand for sand, causing related trailers and railcars to also increase in price. Government estimates of crude output have increased from 9.6 MMbpd in 2017, to 10.7 MMbpd for 2018, and 11.90 MMbpd for 2019. Even offshore rig use is expected to increase after stabilizing in 2017 at a 66% utilization rate.
PLASTIC
The secondary market prices continue to be good in the IMM segment, especially for late model large capacity machines. Y/y new equipment sales look to be up slightly +2.3%. Chinese equipment continues to sell, but at sizable discounts to legacy brands. Also, blow-molding and extrusion segments remain healthy, with blow-molding equipment related to PET bottling declining due to increasing changes in technology, thus lower prices and useful lives. Prices for resin have moved up and down with the price of oil.
POWER/ENERGY
For about the past ten years, values for legacy electric genera tors have been negatively impacted by the EPA. However, recent changes underway have softened the blow. That said, there is a high probability that coal-fired stations in the 100- to 750 MW range might be shuttered due to regulations and/or the “lower-cost” gas alternative. Gas-fired plants cost less than 1/3rd of coal-fired plants to build, but have shorter useful lives. The share of power generated by gas increased from 30% in 2014 to 35% in 2018, while coal’s share fell from 39% in 2014 to 27%. For 2018, the grid is expected to see net capacity additions of 24.4 GW gas; 20.6 GW wind; 8.0 GW solar; and 0.5 GW hydro. Developers added only 7.0 GW new wind capacity in 2017. Retirements for the year were expected to total 2.8 GW for gas-fired plants, and 8.6 GW for coal-fired plants. There are now 89,077-MW of installed wind power in 41 states. Recent wind projects have cost less than $2.00/W. Meanwhile, the solar power market continues to roll with the help of mandates and tax credits. Residential installations now average around $2.90/W versus $6.61/W in 2010. Likewise, the cost of large utility-scale solar projects has fallen nearly 70% since 2010, to less than $1.50/W.
PRINTING
The printing industry grew an estimated 1.0% in 2018 amidst consumer demand changes and new technologies. The largest printing companies remain, but the “general print markets — which once fit neatly into buckets — are converging with com mercial printers, for example, increasingly moving into wide-format and package printing, and signage shops and package printers eyeing complementary commercial opportuni ties,” according to Printing Impressions magazine. New digital press installations are growing an estimated 11.9% annually, according to research firm LPC. Digital presses have made huge inroads with increased speeds and output, for less cost. Vibrant inks have been developed specifically for high-speed digital inkjet presses. And digital presses can now print on paper, plastic, paperboard, cardboard, and other materials. Traditional offset presses are still faster, but digital presses are gaining in speed and equal quality to offset. Printing industry equipment types with strong demand include: digital high-speed color presses; high-speed color web offset presses; corrugated and paperboard box presses; and automated inserters. Equipment with weak demand: traditional offset pres ses (except web offset); traditional bindery; and legacy pre-press (obsolete). High volume print products, including school books, newspapers, shopping catalogs, instruction guides, bank statements, annual stock reports, etc. have largely moved to digital/online media. As a result, many used traditional presses and bindery equipment have machine oversupply. Legacy pre-press equipment is mainly obsolete with almost no demand, as digital pre-press equipment is fast, flexible and less costly. Automated label, paperboard box, and corrugated box printing presses are very desirable with continued growth in online shopping (the “Amazon effect”), which requires voluminous labels, packaging boxes, and shipping boxes.
RAIL
We have noticed a marked increase in rail car and locomotive transactions this year. Overall, the rail industry had a very good year. The industry logged a volume increase of around +1.8% for the year, with intermodal up sharply +5.5%, making total carload and intermodal traffic increase by +3.7%. Top commodities by carload included an increase for 2018 of +17.8% for petroleum and +3.7% for chemical, with carload declines seen in motor vehicles and parts -1.1% and coal -0.6%. Still, coal was the top commodity shipped by carloads, at approx. 243 million. Controversy continued to follow the CBR seg ment as -117J’s have been approved for travel on any line, while some -117R’s are pro hibited from traveling certain lines, and others are charged tariffs. The remaining CPC 1232 “good faith” tank cars must soon be retrofitted or retired from service. New rail car deliveries for 2018 totaled approximately 53,000 units, and are expected to increase to 58,000 units in 2019. As a result of increased values, most rail car lease rates have increased over the past year. However, those increases have been relatively small. Finally, the number of stored cars has dropped to 17% of the fleet from around 27% in 2016. With scrap steel values at near highs, it is expected an increased number of cars in storage will be scrapped.
SEMICONDUCTOR
Prices for most types of semiconductor tools increased in line with their capacities, as IC sales rose by 2% in 2016, 22% in 2017, and 13.4% in 2018, setting a new record high. This increase was driven by the memory market, the largest (35% of the market) and highest performing category for 2018, with 27% revenue growth. Total sales are forecast to continue to grow about 4% in 2019, while the memory shortage and boom of 2017/18 is expected to be followed by a bust cycle in 2019. Samsung held top place in market share over Intel, with 26% growth y/y. These top 2 suppliers accounted for 40% of 2018 semiconductor sales. Semiconductor equipment spending increased by 11% in 2016, 37% in 2017 and 9.7% in 2018 to another industry all-time record high of $62.1 billion. The equipment market is expected to contract 4.0% in 2019 but grow 20.7% in 2020 to reach $71.9 billion. Growth by equipment segment in 2018 is as follows -- wafer processing equipment: +10.2%; assembly and packaging equipment: +1.9%; semiconductor test equipment: +15.6%. In the used market, 200mm and 300mm equipment is still hot, moving from leading edge to other markets, such as commodity devices used for the Internet of Things.
TELECOM
Demand continues for VOIP, backbone and tailbone equipment, LTE and handsets. Primary market spending has been concentrated on expanding 4G LTE rollouts. This will be changing as 5G implementation starts. In 2018, Huawei topped the global telecom equipment market share with 28%, followed by Nokia (17%), Ericsson (14%), Cisco and ZTE (9.5% each). Standards for 5G are “expected” to be developed by 2020. Spending on the 5G equipment ramp is expected to start in the second half of this year and continue through at least 2025. Overall telecom equipment sales were down in the first half of 2018 but gained strength in the second half. 2019 should be a good year for gear manufacturers. The 5G ramp, among other things, will require the installation of a massive number of “small cell” antennas attached to such things as street lamps, utility poles, and telephone
poles. 5G speeds are remarkable, for example a 2 hr. movie would take about 6 minutes to download on 4G, but would take only 4 seconds on 5G. Once implemented, manufacturers and some commercial businesses will employ “private 5G networks” rather than Wi-Fi. Users would have to invest in CBRS spectrum band, hardware + software, and systems management. 2019-2020 appear to be transitional years (4G to 5G) for the telecom equipment gear industry, as it starts to ramp for 5G implementation.
TRUCK/TRAILER
For 2018, Class 8 orders totaled 490,100 units, smashing the old record set in 2004 by 100,000 units. The truck industry is also estimated to have reached record production levels in 2018. As of December 2018, FTR is pegging Class 8 produc tion to come in at 315,000 units and rise to 350,000 units in 2019. According to Don Ake, vice president of commer cial vehicles for research firm FTR, the forecasts are based on continued strong freight growth generating “robust demand” for trucks through the third quarter of 2019. ACT Research is so far holding its Class 8 production forecast for 2019 to 335,000, citing some softening in freight numbers and uncertainty over trade policy and tariffs, but still projects it will be the best since 2006. Regarding medium-duty trucks, ACT reported Classes 5-7 net orders are up 23% year-over-year. Class 8 market share break down: Daimler Trucks 37.4% (incl. Freightliner, Western Star); Paccar 28.9% (incl. Peterbilt 14.8%, Kenworth 14.1%); Navistar 19.2%; and Volvo Group 14.5% (Volvo 8.9%, Mack 5.6%). In a Novem ber 2018 Blue Book report, used truck market resales saw a y/y average age increase of +3.6%, but an average price decrease y/y of about -1.0%. Because of new truck manufacturing backlogs, late model, low-mileage Classes 7 and 8 used truck sales are experiencing strength. The average price for a used Class 8 truck increased by just over 20% in 2018. New Class 8 truck sales increased sharply by about 30% for the year. The average age of a used heavy-duty truck was 6 years and nine months, 2 months younger than in 2017. Meanwhile, average mileage increased 5% to just under 480,000 miles. Estimated used truck inventory is in the low 50 thousands. Inventory levels are expected to grow in 2019, hurting used truck prices. According to FTR, trailer orders for November hit 45,000 units – the fifth highest order month ever and the best November in history. Trailer orders for the past 12 months totaled 427,000 units. Dry van trailer orders are expected to slow in 2019, as most large fleets placed orders in 2018. Sales are expected to exceed 300,000 units.
Economic Commentary
Following is economic commentary compiled by the American Iron and Steel Institute that will frame the various equipment markets previously discussed.
In contrast to signs of slowing growth evident in several indicators of manufacturing and construction activity, the U.S. labor market juggernaut continues to roll onward. Nonfarm payroll employment increased for the 99th
consecutive month in December 2018, surging by 312,000 on a month-over-month basis (m/m). Moreover, November’s increase, originally reported to be 155,000 m/m, was revised upward to 176,000 m/m in the latest Bureau of Labor Statistics (BLS) employment report. Nonfarm payrolls increa sed more than 2.6 million between Dec 2017 and Dec 2018.
Manufacturing payrolls increased by 32,000 m/m in Dec 2018, and increased by 284,000 between Dec 2017 and Dec 2018.
The unemployment rate ticked upward to 3.9% in Dec 2018 after hitting a near-40 year low of 3.7% in Nov. The increase was widely viewed as a positive sign, though, stemming from a larger increase in the civilian labor force than in payroll employment, a sign that robust job prospects and rising wages are drawing additional workers into the labor force. Indeed, the civilian labor force participation rate increased to 63.1% in Dec 2018, up from 62.9% the prior month, the highest rate since 2013.
Meanwhile, average hourly earnings increased at a 3.3% clip on a year-over-year basis (y/y) in
Dec 2018, identical to November’s upwardly revised increase, and matching the strongest growth since 2009.
The Bureau of Econo mic Analysis’ (BEA) final esti mate of 3rd quarter 2018 real gross domestic product (GDP) growth was 3.4% at a seasonally adjust ed annualized rate (SAAR), a small down ward revision from earlier estimates of 3.5% growth. The economic expansion is estimated to have continued in the 4th quarter of 2018 and is projected to extend into 2019, albeit at a slower pace than recorded in recent quarters. The Federal Reserve Bank of Atlanta’s real GDP growth estimate for the 4th quarter is tracking at 2.8% SAAR based on monthly data released through January 10, 2019. The Jan 2019 Blue Chip consensus forecast is slightly weaker at 2.7% SAAR. BEA’s initial estimate of 4th quarter GDP is scheduled to be released January 30, 2019, but may be delayed due to the partial shutdown of the federal government.
The Blue Chip consensus for full year growth for 2018 and 2019 remains unusually stable. The forecast for 2018 held at 2.9% growth for the 8th month in a row, while the forecast for 2019 held at 2.6% for the 10th month in a row.
Manufacturing Activity
Manufacturing sector industrial production (IP) was unchanged m/m in Nov 2018. IP had increased for four consecutive months between May and September before showing signs of flattening in the two latest months.
Meanwhile, factory orders have trended downward in the last few months. The dollar value of non-defense, non-aircraft capital goods orders (so-called core capital goods orders) increa sed in five of the first seven months of 2018, but have since posted declines in four of the five months from Sept through Nov. Core capital goods orders fell 0.6% m/m in Nov 2018, but were still 6.5% higher than in the same month last year.
Although the ISM manufacturing index retreated in Dec 2018, falling to 54.1 points from 59.3 points in Nov, it nonetheless indicated the manufacturing sector expanded for the 116th month in a row. (Index values above 50 points are associated with expansion in manufacturing activity, while values below 50 points
indicate contraction.) Eleven of the 18 subsector indexes in the ISM survey increased in Dec, down from 13 the previous month. Both the production and new orders indexes slid in Dec—the production index from 60.6 to 54.3 and the new orders index from 62.1 to 51.1.
Energy
Final 3rd quarter 2018 data from BEA confirmed that growth in real investment spending on mines and wells weakened during the July to Sept period.Investment dropped 10.4% SAAR compared to the April to July period, identical to the advance estimate, the 1st decline in the last 7 quarters. Investment had more than doubled between the 3d quarter of 2016 and the 2nd quarter of 2018.
More recent Baker Hughes rig count data suggests drilling activity was largely flat over the last few months of 2018 amid an increase in oil price volatility. The total active drill ing rig count averaged 1,077 in Dec 2018, identical to Nov’s reading, and slightly higher than Oct’s. The oil rig count averaged 880 in Dec 2018, down slightly from 884 in Nov, but higher than the average of 870 recorded in Oct. Both the total rig count and the oil rig count, though, were sharply higher in Dec 2018 than in the same month in 2017.
Construction
The partial shutdown of the federal government has shuttered most statistical opera tions of the Census Bureau. As a consequence, Nov 2018 data on construction put-in-place have not yet been published. The limited amount of data from other publicly available sources suggests that the environment for residential construction improved slightly in Nov, while the nonresidential segment deteriorated.
Dodge Data and Analytics reported that the value of construction starts declined 7% m/m in Nov 2018 to $789.3 billion SAAR. Residential building starts slipped 1% m/m, while nonbuilding project starts fell 2% m/m, and nonresidential building starts tumbled 15% m/m.
For the first eleven months of the year, the value of construction starts was up 1% y/y, with residential starts increasing 6% y/y, nonbuilding project starts falling 3% y/y, and nonresidential building starts down 2% y/y. Note
that the Dodge starts data record the full value of a construction project in the month in which it breaks ground rather than record ing the incremental spending that takes place each month over the life of a project as do the Census Bureau’s construction put-in- place estimates.
The Census Bureau’s Nov 2018 report on housing starts and issuance of residential building permits was published prior to the shutdown. Housing starts increased 3.2% m/m in Nov 2018 to an annualized pace of 1.256 million units, but are down 3.6% y/y. Nov’s monthly increase was fueled by a 22.4% m/m jump in the multi-unit segment, while single-unit starts fell 4.6% m/m. Residential building permits also gained ground in Nov, rising 5.0% m/m, and are up a slight 0.4% y/y.
Macroeconomic Indicators
Industrial Sector Indicators
Construction Sector Indicators
Conclusion
I hope you found this newsletter informative. Overall, I note that the continued good health of the economy is lifting almost all boats. As always, we stand ready to assist with any of your equipment management needs. We are your “one stop” service provider that is just an email or phone call (727-796-7733) away. Thank you and Happy New Year!
Carl Chrappa, A.S.A., M.R.I.C.S., I.F.A.The Alta Group LLCSenior Managing Director – Asset Management Practice Leader2451 McMullen Booth Road, Suite 305Clearwater, FL [email protected]://thealtagroup.com/asset-management/P: 727-796-7733F: 727-725-3757
