Supply Chain Trends
Capital Investment Waiting Game Continues

Capital Investment Waiting Game Continues

Analysts at the Manufacturers Alliance for Productivity and Innovation released a new study this month highlighting the importance of capital investment to productivity performance in manufacturing environments. The study analyzes productivity growth in a range of manufacturing subsets over the past 25 years, with an eye toward identifying ways that manufacturers who have already invested in capital equipment can improve productivity and innovation on the plant floor, and how such improvements can ripple throughout the supply channel.

Published by the MAPI Foundation, Productivity Dynamics in U.S. Manufacturing was conducted by Cliff Waldman, MAPI Foundation director of economic studies, and sponsored by industrial automation firm Rockwell Automation. The report is part of a new series on productivity the organization is producing this year.

The report comes at a time when suppliers tied to industrial markets continue to wait for pent-up need for capital investment to take hold. The slow-growth economy has caused this concern for the last couple of years, affecting everything from energy markets to makers of machinery and heavy equipment. TTI’s Lew LaFornara pointed to the issue as an ongoing concern in a recent interview with Global Purchasing contributor Bridget McCrea.

“It’s unclear when the oil and gas market will hit bottom or how long it will take to recover. The state of the downhole industry (i.e., the process or business of extracting ore or minerals from the ground) has impacted the alternative energy markets, as well as many other peripheral market segments,” LaFornara said. “The broader industrial market segment is relatively flat as investments in new plants and equipment are delayed due to the weak overall environment.”

How long that delay will last remains to be seen, but others in the industry expect some movement over the next couple of years. In a mid-year outlook report last summer, Allied Electronics’ President Scott McLendon emphasized the issue as well.

“There are a few long-term economic headwinds challenging the industrial market,” he said, pointing to the strong U.S. dollar, in particular. “I don’t think that will subside this year. But long-term, there is about $65 billion in [U.S. factory] automation that needs to re-fresh, and that will fuel capital equipment spending growth.”

It looks like the waiting game will continue in 2016. Commenting on January data for durable goods orders, MAPI’s Waldman pointed to an ongoing “stubborn weakness” in capital investment behavior. Although January numbers bounced back from a plunge in December, they were still up less than a percentage point compared to January 2015—and down 2.5% excluding transportation, Waldman noted.

“Key subsectors that have wide-ranging intersections with manufacturing supply chains, such as primary metals, fabricated metals, and machinery, also saw a bounce-back from December weakness but were nonetheless disconcertingly below January 2015 levels,” he wrote. “Most notably, new orders in the primary metals subsector were 15.6% below last year’s performance.”

Though uncertainty and waiting continue, the situation adds up to an economic bright spot when you take the long-term view. When investment takes hold, as it eventually must, suppliers will be more than ready to reap the benefits. 

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