SAY WHAT' HOUSING CREDIT CRISIS HELPS MANUFACTURING STAY STABLE

"In July machine shops grew and the delinquency rate on machine tool leases dropped. The delinquency rate on machine tools is about one-sixth of the delinquency rate on home mortgages (Figure 1). In some ways, the housing credit crisis has provided some support for manufacturing, partially offsetting the impact of reduced production of household appliances and other housing related products.

The crisis caused the Fed to cut interest rates. The lower interest rates help keep short-term corporate borrowing costs low and have helped produce a dramatic reduction in the value of the U.S. dollar vs. the currencies of most of our trading partners. The lower dollar is the largest driver of our higher exports and lower imports of manufactured products. The lower dollar also contributed to the increase in oil prices, dramatically raising shipping costs from Asia to the U.S.

As an example, the cost to ship a container from Shanghai to Long Beach is up from $3,000 to 8,000 in the last ten years. Similarly, the related increases in metal prices have reduced labor costs as a percentage of total product cost, reducing the relative advantage of the low-wage countries." commented Harry Moser, chairman of Agie Charmilles. A detailed breakdown of results by geographic region and application/sector is shown in Figure 1-1.

The Agie Charmilles Machining Business Activity Index decreased to 59 in July from 61 in June. The Index is created by surveying machine tool users concerning their current business level versus three months earlier (April 2008). Any reading above 50 indicates that business activity has improved. Activity was strongest in the Midwest and South and in Medical companies. The Index was inaugurated in October 2004 and is the only known monthly index of business activity in U.S. machining industries. Historical data is shown in Figure 2.

The Agie Charmilles/USBEF Machining Industry Financial Strength Index strengthened to 400 in July 2008, from 385 in June 2008 and 55 in January 2002, the worst reading on record, but down from 526 in July 2007.  The index shows a slow, steady deterioration over the last 12 months from a historic high in early 2007. Any reading above 100 indicates that US Bancorp Equipment Finance's (USBEF's) machine tool lease payment delinquencies (a good measure of machine tool users' liquidity and consistent profitability) are at a rate below the average rate of 1990 to 1999.

In June the 30-day delinquency rate on machine tool leases remained close to the lowest level on record, approaching 1 percent, which is much lower than the credit card or the home mortgage delinquency rate (6.35 percent in the first quarter 2008, per the Mortgage Bankers Association). Even the home foreclosure rate of 2.47 percent was two to three times the machine delinquency rate. As profitability rises, liquidity rises, delinquencies fall and the Index rises. Historical data is shown in Figure 3 and is available at the Agie Charmilles URL mentioned above. 

The approximately 126,000 U.S. companies that use machine tools have about 2 million machine tools and 750,000 to 1,000,000 directly related employees (toolmakers, machinists, operators, programmers, etc.). Almost all mid-size to large manufacturing companies use, and periodically purchase, or lease, machine tools. Thus, these indices give timely insight into the condition of U.S. manufacturing. The Machining Business Activity Index is a coincident indicator of this key manufacturing sector. The Financial Strength Index lags business activity and leads capital investment.

Agie Charmilles, 560 Bond Street, Lincolnshire, IL 60069-4224, 800-CTC-1EDM, Fax: 847-913-5340, or www.gfac.com/us.