1. Gear Market Report 2009 Professor Michael D. Bradley

2. The American “Gear Industry” Open-market segment of the gear industry.Open-market segment of the gear industry. Excludes captive production of automotive gears and transmissions. (Which is about 3 times the size of the open-market portion.)Excludes captive production of automotive gears and transmissions. (Which is about 3 times the size of the open-market portion.) Sometimes known as the “IMA” sector for Industrial, Marine, and Aerospace.Sometimes known as the “IMA” sector for Industrial, Marine, and Aerospace.

4. How Big is the IMA Gear Industry? According to the 2007 Census of Manufactures: 23813,929 10,148 There are 238 establishments employing 13,929 workers including 10,148 production workers. $3.4 billion $2.9 billion The total value of shipments from those establishments was $3.4 billion. Of that, about $400 million were resales and contract receipts leaving about $2.9 billion in primary shipments. $3.1 billion (AGMA’s statistical program estimated primary shipments in 2007 of $3.1 billion.) $37.5 million $6.9 million $17.0 million The gear industry spent $37.5 million on repair of buildings and equipment, $6.9 million on advertising and promotions and paid $17.0 million in taxes.

5. Capital Expenditures in the IMA Gear Industry in 2007 Total Capital Expenditures: $127.1 million Buildings & Structures: $19.9 million Machinery & Equipment: $107.2 million Vehicles: $3.2 million Machinery: $98.9 million Computers: $5.0 million In addition, the industry spent: $12.7 m on building rental $10.0 m on equipment rental $10.4 m on expensed hardware, software, and data processing services.

6. AGMA Composite Shipments Index

9. Gear Shipments By Market Segment

10. Both Segments Share the Pain

11. As painful as this downturn has been for the domestic gear industry, it could have been worse... consumption production Domestic consumption of gears has fallen more than domestic production of gears. The American gear market is very open:

12. Gear Imports 14.1% Growth in Imports for 2007 16.8% Growth in Importsfor 2008 16.8% Growth in Imports for 2008 -24.9% Decline in Importsfor 2009 -24.9% Decline in Imports for 2009

13. Gear Exports 10.4% Growth in Exports in 2007 16.6% Growth in Exports in 2008 -15.5% Decline in Exports in 2009

14. Gear Trade Balance The recession could bring a marked improvement in the trade gap

16. How does the current recession match up?

17. Overall economic activity is the outcome of the “push and pull” by the various sectors in the economy.

20. 18% Decline

21. 21% Decline

22. Enclosed Drive Shipments Are Driven By Durable Goods Activity

23. Open Gear Shipments Are Driven By Non Durable GoodsActivity Open Gear Shipments Are Driven By Non Durable Goods Activity

24. Durable Goods Shipments Growth Wood Products Primary Metals Fab. Metal Products MachineryComputers Electrical Equip. Transportation Equip. Furniture Average 19% Decline from SPLY -- Last 6 Months

26. Non-Durable Goods Shipments Growth Food Products TextilesApparel Leather Products Paper Products Printing Petroleum & Coal Chemicals Plastic and Rubber Average 20 Decline from SPLY -- Last 6 months

28. Is the recession over? Has the economy hit bottom? The question everyone is asking: What it really means:

29. Moderating Firmed Improvement Stable

31. Is the manufacturing recession over?

34. PMI Index An index value > 50 means growth in the manufacturing sector. August’s index suggests growth in manufacturing

35. New Orders Index Textiles Paper Products Printing Apparel Leather Products Electrical Equipment Appliances Computers & Electronics Wood Products Chemical Products Fabricated Metal Products Plastic & Rubber Products Transportation Equipment Increases in new orders are widespread across manufacturing

36. Is the gear market recession over?

37. Composite Shipments Change from SPLY

38. A Pressure Curve View of a Recession Recession Ends Recession Begins

41. We gotten to the point where the terror of freefall is over, but what does the path forward look like? A Familiar Shape

42. 1. Labor Market Weakness Households face: –Little accumulated savings –Limited borrowing ability. A sustained increase in consumption requires rising household income. –Growing employment is key for stimulating both income and confidence growth

46. 2. Rising Government Debt Government debt typically rises in a recession but the current and expected debt growth is extraordinary. The federal government is extracting funds from the financial markets making it harder for households and firms to finance increases in economic activity.

49. 3. The Liquidity Bomb Households & Firms Federal Reserve Commercial Banks The Monetary Base The Money Supply Where does the money supply come from?

51. Unprecedented Growth in the Base

52. 4. Fragility of the Financial System Last year’s financial crises inflicted widespread injury on the financial systems. Historically, financial systems respond slowly to such crises. The financial market will be a constraint on a speedy recovery.

53. Default Rates on Commercial Real Estate Loans

55. 5. Excess Capacity and Weak Profits This recession has been deep and has severely hit manufacturing and construction. Production levels are far below capacity. Excess capacity hinders growth in plant and equipment spending. Weak profits in tight credit conditions also inhibit P&E spending.

59. Gear Market Outlook A gear market recovery requires of couple of successive quarters of improved economic activity.A gear market recovery requires of couple of successive quarters of improved economic activity. The nascent recovery in manufacturing is good news for the gear market.The nascent recovery in manufacturing is good news for the gear market. An investment-lead recovery would be very helpful the gear market.An investment-lead recovery would be very helpful the gear market. There are some signs that the gear market is ready to turn.There are some signs that the gear market is ready to turn.

60. Ratio of Gear Bookings to Gear Shipments

61. Gear Market Forecast The enclosed drive sector of the market should “bottom out” by the end of the year.The enclosed drive sector of the market should “bottom out” by the end of the year. The open gearing sector is right behind, turning late in the 1 st quarter of 2010.The open gearing sector is right behind, turning late in the 1 st quarter of 2010. It will take until the end of 2010 until the gear market is making real gains on a year-over-year basis.It will take until the end of 2010 until the gear market is making real gains on a year-over-year basis.

63. Conclusion... Cut Once... Cut Once Measure Twice...