December 13th, 2012
by Lee Adler, Wall Street Examiner
One of the slew of economic releases last week was factory orders. It rebounded in October on a not seasonally adjusted basis (NSA) and adjusted for inflation, after two weak months in August and September. That’s a bullish sign, not only because it keeps the weak uptrend alive, but also because October is usually a down month. With Fed QE3 cash just starting to hit the market in November, both factory orders and stock prices should correlate with resumption of a rising Fed asset base in the months ahead.
Click to enlarge
New factory orders, which are a broader measure than durable goods orders because they include non-durables, increased in October. They also reversed the pattern of year to year declines over the previous two months by gaining versus the corresponding period last year.
I have adjusted this measure for inflation and use not seasonally manipulated data in order to give as close a representation as possible of the actual unit volume of orders and thus the actual trend. Real new factory orders, NSA, were up 2.9% year over year. That was better than both August and September which had year to year declines of 4.3% and 1.7% respectively. The annual growth rate has been in a downtrend since April of 2010. That current rate of change was an improvement, and was positive year to year, but it has not yet reversed the slowing trend in the growth rate. That would require another up month.
The month to month change was a gain of 1.6%. October was a down month in 7 of the prior 10 years. October 2011 saw a decline o 3.1% while in 2010 was it was down by 4.3%. The average October change form 2002 to 2011 was a decline of 1.5%. This year’s number stacks up well in comparison. But the uptrend that’s been under way since the “recovery” began in 2009 has steadily been losing momentum.
Don’t believe the hype about a return of US manufacturing. It ain’t happening, as the chart above makes clear. Total new orders have yet to reach the levels of 2007 after 3 years of uptrending.
The ISM new manufacturing orders index for November (NSA) softened but was still above 50, suggesting that another weak gain is coming in the factory orders data for November. The weak uptrend should continue. The peak level for the year is typically in March. The low for the year is usually in January or February. For the uptrend to remain intact, this index would need to stay above the lows, and then break out to a new high in March.
The manufacturing data has tended to trend with stock prices, with both clearly reacting to Fed quantitative easing or tightening. In 2008, there was a late burst of manufacturing activity after the Fed had begun to withdraw liquidity from the markets by shrinking the SOMA while conducting emergency lending operations to the banking and shadow banking structures, cutting out the usual direct funding of the Primary Dealers. Draining funds from the Primary Dealers caused the 2008 stock market crash, but because the Fed was flooding other financial structures with liquidity directly, manufacturing held up for a while. It finally succumbed when the Treasury crowded out the rest of the market in 2008 when the US Government raised $800 billion in a short period of time in September-October 2008 for stimulus and TARP.
That won’t happen again. The manufacturing data should correlate better with stock prices when this market does top out. I expect both to follow the Fed when it finally stops QE. In the meantime, with the Fed’s SOMA growing again as a result of its QE3 MBS purchases beginning to settle in November and another big cash settlement coming from December 12-20, both stocks and manufacturing activity should maintain an uptrend.
This post is an excerpt from the permanent chart page on ISM Manufacturing and Non Manufacturing New Orders, and Factor Orders.
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