We remain extremely cautious on the machinery sector.
As foreign economies deal with weaker exports to the U.S and Europe, industrial customers are cutting back on capital spending. Equipment orders are decelerating in almost every end-market -- from machines used in construction, infrastructure, agriculture to base metal projects.
There are several data points that help to paint the picture of a sharply deteriorating global economic backdrop. Japan's core machine orders fell 1.7% in December, and fell in 8 months of the full year 2008.
What's more, according to the cabinet office in Japan, overseas orders fell a whopping 26.8% in December and 16.7% for the fourth quarter of 2008. While a manufacturing survey conducted by the cabinet office indicated core orders would rise 4.1% in the first quarter of 2009, we think this forecast may prove to be too optimistic. We would not be surprised to see core orders decline in each quarter of 2009. Japanese industrial production fell 9.6%. Exports fell 35.1%.
Also, according to the VDMA machine makers association, German plant and machinery orders fell a massive 40% in December from the same period a year ago, with export orders declining 30%. While mining-machinery orders are expected to increase in 2009, we believe the outlook could become more pessimistic with a further decline in commodity prices.
Separately, in December, German output fell 12%, production of intermediate goods fell 8.2%. November exports fell 10.8% relative to October levels. Further, manufacturing orders fell for the fourth consecutive month in December.
The domestic picture appears to be no brighter. In a recent blog, Zacks Director of Equity Research Dirk van Dijk noted, "Total industrial production fell 1.8% in January, following a decline of 2.4% in December and a 1.2% decline in November. It is now down 10.0% on a year-over-year basis. If one only looks at manufacturing output, the picture is even worse, with a 2.5% monthly decline following declines of 2.9% and 2.2% in December and November, respectively.
"On a year-over-year basis, manufacturing output is down 12.9%. Colder-than-normal weather has been propping up the output of Utilities, where production rose 2.7% in January, following a 0.2% decline in December and a 2.0% increase in November.
"Capacity Utilization also fell sharply in January, down to 72.0% from 73.3% in December for the overall index.
