US: Core machinery orders down for first time in 5 years – Nomura

Japanese core machinery orders (private sector, excluding orders for ships and from electric power companies) fell 11.9% m-m in December 2017, for a result well below the consensus forecast (Bloomberg survey median forecast) of a 2.0% decline.

Key Quotes

“This means that orders were down 0.1% q-q in Oct-Dec, and while orders remained on the strong side in October and December (up 5.0% and 5.7% m-m, respectively), the result for the overall quarter was only roughly flat on average versus that for Jul-Sep. We also note that orders were down 1.1% y-y in 2017, for the first decline in five years on this basis.”

“Manufacturing sector orders continue to grow on the back of semiconductor demand

A breakdown by sector shows that manufacturing sector orders were up for a third straight quarter, rising by 4.0% q-q. It appears that general-purpose and production machinery (a sector related to semiconductor production and demand) and electrical machinery (a sector related to production-use machinery and equipment) significantly boosted the scale of overall growth here with rises of 9.8% and 23.8% q-q. We believe that semiconductor demand will prove particularly strong moving forward, not only for smartphones, but also for data centers and automotive applications. We look for ongoing firm growth in orders from these sources.”

“Nonmanufacturing sector orders remain weak, moves toward labor-saving investment notwithstanding

Meanwhile, nonmanufacturing sector core orders turned to decline once again in Oct-Dec, falling 2.0% q-q. We note that orders have been strong from sectors faced with particularly acute labor shortages (according to the employment conditions DI in the BOJ’s Tankan survey and other sources), including construction (up 7.0% q-q) and wholesale & retail trade (up 24.7%). However, it appears that such moves towards labor-saving investment are yet to fully make their mark on nonmanufacturing sector orders as a whole.”

“Near-term order outlook on the weak side, but corporate capex appetite likely to remain strong

• As for the outlook from here, we note that machinery manufacturers expect core machinery orders to grow by a slight 0.6% q-q in Jan-Mar 2018 (we assume that this was the survey outlook as of late December 2017). This strikes us as a slightly weak forecast, considering that such orders were down 0.1% in Oct-Dec 2017. However, a breakdown shows that manufacturing sector orders (which have shown a brisk trend to date) are expected to decline 5.7% and nonmanufacturing sector orders (which have been weak) are expected to rebound to 7.4% growth. This would appear to be a positive development.
• FY17 capex plans (excluding software investment, including land purchases) as given in the December 2017 BOJ Tankan survey call for stronger growth than in previous surveys for the same period. This suggests that there has been no clear pullback in corporate capex appetite, and we accordingly maintain our outlook for ongoing growth in capex throughout 2018 at the very least.”