October 2011 Manufacturing Sales Improve Slightly

US Census says manufacturing new orders declined 0.5% in October 2011. Econintersect analysis shows growth improved 0.5% month-over-month.

Econintersect believes the US Census seasonal analysis was distorted by abnormally strong October 2007 new orders (see caveats at the end of this post).

US Census Headline:

  • Manufacturing new orders down 0.5% month-over-month, and up 12.3% year-over-year

Econintersect Analysis:

  • Manufacturing new orders up 0.5% month-over-month, and up 10.1% year-over-year
  • Manufacturing new orders (inflation adjusted) up 2.2% month-over-month, up 2.9% year-over-year

Manufacturing, although growing at a fantastic 10.1% year-over-year growth rate – when adjusted for inflation is growing only slightly better than real (inflation adjusted) GDP at 2.9% year-over-year.

The unadjusted year-over-year new orders growth rate has been between 10% and 15% most of 2011, but the inflation adjusted rate of growth has been declining since mid-2010.   In the above chart, you will note that the unadjusted year-over-year gain was less than the inflation adjusted – the reason is the inflation headwinds have subsided somewhat being 8.9% in September and is 7.2% in October for the manufacturing PPI subindex.

The health of manufacturing is gauged by the growth of unfilled orders.  Econintersect has fine tuned the inflation index this month from the PPI finished goods to the specific PPI index for manufactured goods.  The year-over-year inflation adjusted growth is -0.2%.

Caveats on the Use of Manufacturing Sales

The data in this index continues to be revised up to 3 months following initial reporting. The revision usually is not significant enough to change the interpretation of each month’s data in real time. Generally there are also annual revisions to this data series.

The methodology used by US Census to seasonally adjust the data is not providing a realistic understanding of the month-to-month movements of the data. One reason is that US Census uses data over multiple years which includes the largest modern recession which likely distorts the analysis. Further, Econintersect believes there has been a fundamental shift in seasonality in the aftermath of the Great Recession of 2007 – the New Normal.

Econintersect determines the month-over-month change by subtracting the current month’s year-over-year change from the previous month’s year-over-year change.  This is the best of the bad options available to determine month-over-month trends – as the preferred methodology would be to use multi-year data (but the New Normal effects and the Great Depression distort historical data).

This series is NOT inflation adjusted – Econintersect uses the PPI – subindex All Manufactured Goods.

However, this is a rear view look at the economy. Manufacturing generally correlates to the economy – but it is not obvious in real time whether a recession is imminent. If down trends are used, it has given 4 false warnings.  If crossing the zero growth line, is used – it did not indicate the last recession until it was half over.  So in context to economy watchers – manufacturing sales by itself cannot be used as an economic gauge.

The same issues are also evident if manufacturing backlog is used as a recession gauge.

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