By JOYCE M. ROSENBERG, Associated Press
NEW YORK (AP) — Small businesses that make machines and components for other manufacturers are experiencing an upswing that could be a sign of things to come for the broader economy.
The industries fueling the demand vary. In some cases, business is coming from medical device makers, which are expected to see increasing growth as baby boomers age and need more medical care. An uptick in orders is coming from oil and gas producers supplying energy to growing economies in countries such as China and India. And then some are getting a pop in sales from aerospace manufacturers that are busy building fuel-efficient aircraft and engines and need special parts to get the job done.
As different as these manufacturers may be, they have two things in common: Their industries are expected to see continued growth and they are they're investing in expensive machinery that can cost millions of dollars.
This small manufacturer machinery boom may seem at odds with an economy that is suffering from slow job growth following the worst recession many can remember. But the increase in demand for gear that businesses use to make a variety of machines, parts, tools and devices is a sign that companies are more confident and are willing to spend. They're also getting loans from banks to buy the equipment — evidence that lenders are feeling more secure.
Last year, industrial and materials manufacturers had a 37 percent increase in big equipment purchases, according to PayNet, a company that tracks lending to small businesses. That compares to an average of 17 percent for all the industries PayNet follows.
"We're positioning ourselves now to have the capacity to respond quickly," says Pat Pastoors, general manager of Dynamic Sealing Technologies, which last month spent $450,000 on new equipment after spending $800,000 last year. In 2011, Dynamic Sealing paid $3.2 million to expand its Andover, Minn., factory. The company makes manufacturing equipment for companies including food packagers and oil and gas producers. Pastoors says the company sees good potential growth in the industries it serves. The company's revenue rose 20 percent last year after doubling in 2010.
THE FIRST STEP
Skeptics should talk to the bankers who grant loans to companies that make gear and parts for other manufacturers, like Anthony Cracchiolo, president of U.S. Bank's equipment finance unit. U.S Bank's lending through its Manufacturing Vendor Services division, part of the equipment finance unit, is up 15 percent this year from the same period of 2011. And last year's lending level was up 26 percent from 2010. Equipment sales had fallen 70 percent during the recession. More recently, the bank, which is based in Minneapolis and has branches in 25 states, has seen an increase in demand for big machines like lasers, molding equipment and plastic injection machines.
By the end of this year, U.S. Bank expects this type of lending to be at 90 percent of pre-recession levels. It expects the recovery among these manufacturers to reach other parts of the economy.
"This is the first step, the people that build the machines," Cracchiolo says.
Sales for privately held industrial machinery manufacturers, including companies of all sizes, are up nearly 23 percent in the last 12 months, according to Sageworks, a financial research firm.
Wells Fargo & Co. also is seeing an increase in lending to companies that manufacture products for other companies, says Hugh Long, head of business banking. The bank would not provide a breakdown of how much lending to companies that make machinery and components has gone up, but "that particular subset of the manufacturing business is quite active," Long says.
Morris Technologies spent $1 million on an electronic beam melting machine in January. The company, based in Cincinnati, uses a sophisticated technology called additive metal fabrication to create complex parts for planes, turbines, medical equipment and other machinery. It's a manufacturing method that uses computer models and molten metals to build components one layer at a time rather than carving them out of a block of metal.