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moldmakingtechnology.com 23 The U.S. monetary base is an excellent leading indicator of capital equipment consumption. Historically, changes in the monetary base lead changes in capital equipment consumption by 24 months, on average. The monetary base saw its peak growth last summer, which means equipment consumption should see accelerating growth through 2015 and possibly into 2016. tion) are buying as the type of manufacturing resources that they consider the best investments right now. Leading Indicators All Positive Gardner Business Media's department of market intelligence tracks four leading indicators of capital equipment spend- ing: the monetary base, capacity utilization, the MoldMaking Business Index (see page 44 of this magazine) and industrial production. All four point to significantly higher spending in 2015, but two are more important than the others. The monetary base. The monetary base is equivalent to the size of the balance sheet of the Federal Reserve or the amount of physical money in circulation. The Federal Reserve controls these numbers through the purchase or sale of bonds and other securities. When the government pumps more money into the economy, it generally leads to capital equipment spending. Prior to 2008, the annual rate of change in the mon- etary base ranged roughly from 5 to 15 percent. Since the finan- cial collapse in late 2008, the Federal Reserve has increased the U.S. monetary base by more than 400 percent, so that the annual rate of change has stayed above 15 percent for nearly five straight years (see Chart 2) with peak rates of growth high- er than 28 percent three separate times during this period. This dramatic surge in the monetary base has spurred signif- icant increases in capital equipment spending in recent years. Typically, changes in the monetary base lead changes in capital equipment spending by 24 months. With the monetary base hitting its peak rate of growth in the summer of 2014, capital equipment spending should see accelerating growth through 2015 and perhaps into 2016. While the fantastic rate of growth in the money supply has helped manufacturing and, to some extent, the entire economy in the short term, it is a disastrous policy for the long term. At some point in time, the money printing will have to end. Last October, the Federal Reserve ended its quantitative eas- ing program (a policy by which the Fed injects money into the economy by purchasing securities, typically government bonds, with electronic money that did not exist previously). Will this cause interest rates to rise or the U.S. dollar to rise against other currencies or the stock market to fall? If any of these events happen to a significant degree, will the Federal Reserve then reinstitute some form of quantitative easing? The answers to these difficult questions will likely have a major impact on investment in machine tools in the upcoming years. Capacity utilization. Of course, most manufacturers do not watch the monetary base as an indicator of when they should buy capital equipment. Most companies make investment decisions based on capacity utilization—how busy existing equipment is at the moment. The Capital Spending Survey generally shows that the need to increase capacity has been the top motivator for shops to buy capital equipment. This finding has not changed in 25 years. In facilities producing durable goods, capacity utilization is at its highest level since early 2008 and has been increasing at an accelerating rate. Shops are getting busier at a quicker pace. This accelerating growth is likely to continue, based on the correlation between backlogs in our business index and capacity utilization. Durable goods capacity utilization could reach 80 percent in 2015 for the first time since June 2000, and durable goods capacity utilization could average more than 80 percent for the first time since 1998 (see Chart 3). Equipment Purchasing Trends According to the survey, moldmakers will spend nearly $500 million on machining centers, grinders and EDM equipment in 2015. That's an increase of 32 percent over 2014, and it's nearly Monetary Base Leads Capital Equipment Consumption CHART 2