Manufacturing April 2012 Data Is Not Pretty

Written by Steven Hansen

US Census says manufacturing new orders declined 0.6% in April 2012, and Econintersect analysis shows new orders improved 1.1% month-over-month.

Yet stepping back from the data:

  • the whole data series underwent its annual revision, and whether one believes the data is better or worse can only be made after comparing the changes to the data sets.
  • something is amiss between industrial production which has been hovering around 5% annual growth in April, and manufacturing shipments which are 3%.

This data raises some serious questions.  Combined with the questions, the data does not look good.

US Census Headline:

  • Manufacturing new orders down 0.6% month-over-month, and up 6.6% year-to-date (down from 7.8% originally reported for March)
  • Market expected month-over-month range of -0.3% to +0.1%
  • Manufacturing unfilled orders down 0.1% month-over-month, and up 9.3% year-to-date

Econintersect Analysis:

  • Manufacturing new orders up 1.1% month-over-month, and up 3.2% year-over-year
  • Manufacturing new orders (inflation adjusted) up 2.8% month-over-month, up 0.8% year-over-year
  • Manufacturing unfilled orders down 0.6% month-over-month, and up 9.3% year-over-year

What data series looked like last month:

What data series looks like this month (differences in the last 12 months data obvious):

Note the record last month (March 2012) on the above graph. Compare the relationships between months before and after the Great Recession (ignore 2007,2008, and 2009).  It appears the manufacturing seasonality has changed, or is transitioning.

However, year-over-year growth has returned to a declining trend (slowing growth, negative acceleration).  Note the below data is unadjusted.

Last month’s year-over-year change:

This month’s year-over-year change (changes insignificant):

The inflation adjusted year-over-year new orders growth rate has been hovering between zero and 5% for the last 12 months.  Now look at the manufacturing component of industrial production which monitors production.  While it is true that new orders and sales are different pulse points – they should not have different trends for long periods of time.

Normally I do not evaluate shipments which should correlate well to industrial production, but it must be noted this month the year-over-year growth is 3.0% versus IP’s 5%+.

The health of manufacturing is gauged by the growth of unfilled orders. The year-over-year growth is 5.1% (inflation adjusted growth is 0.5%).

Last month’s unfilled orders graphic:

This month’s unfilled orders graphic shows little inflation adjusted for the last 18 months:

Here again, the data is beginning to decline.  This could be a recessionary indication.

The headlines from the press release:

New orders for manufactured goods in April, down three of the last four months, decreased $2.9 billion or 0.6 percent to $466.0 billion, the U.S. Census Bureau reported today. This followed a 2.1 percent March decrease. Excluding transportation, new orders decreased 1.1 percent. Shipments, down following four consecutive monthly increases, decreased $1.5 billion or 0.3 percent to $473.2 billion. This followed a 0.1 percent March increase. Unfilled orders, down following twenty-seven consecutive monthly increases, decreased $0.8 billion or 0.1 percent to $985.4 billion. This followed a slight March increase. The unfilled orders-to-shipments ratio was 6.33, up from 6.29 in March. Inventories, up twenty-two of the last twenty-three months, increased $0.1 billion to $607.2 billion. This was at the highest level since the series was first published on a NAICS basis in 1992 and followed a 0.1 percent March increase. The inventories-to-shipments ratio was 1.28, unchanged from March.

New Orders. New orders for manufactured durable goods in April, down three of the last four months, decreased $0.1 billion to $215.2 billion, revised from the previously published 0.2 percent increase. This followed a 3.7 percent March decrease. Machinery, also down three of the last four months, had the largest decrease, $0.9 billion or 2.9 percent to $31.0 billion. New orders for manufactured nondurable goods decreased $2.9 billion or 1.1 percent to $250.8 billion.
Shipments. Shipments of manufactured durable goods in April, up four of the last five months, increased $1.4 billion or 0.6 percent to $222.5 billion, revised from the previously published 0.7 percent increase. This followed a 0.9 percent March increase. Transportation equipment, also up four of the last five months, had the largest increase, $1.9 billion or 3.1 percent to $63.8 billion. Shipments of manufactured nondurable goods, down two consecutive months, decreased $2.9 billion or 1.1 percent to $250.8 billion. This followed a 0.7 percent March decrease. Petroleum and coal products, also down two consecutive months, drove the decrease, down $3.2 billion or 4.4 percent to $69.8 billion. This was the largest decline in petroleum and coal products since a 7.9 percent decrease in July of 2009.

Unfilled Orders. Unfilled orders for manufactured durable goods in April, down following twenty-seven consecutive monthly increases, decreased $0.8 billion or 0.1 percent to $985.4 billion, unchanged from the previously published decrease. This followed a slight March increase. Transportation equipment, down two consecutive months, had the largest decrease, $1.6 billion or 0.3 percent to $566.5 billion.

Inventories. Inventories of manufactured durable goods in April, up twenty-seven of the last twenty-eight months, increased $1.2 billion or 0.3 percent to $364.2 billion, unchanged from the previously published increase. This was at the highest level since the series was first published on a NAICS basis and followed a 0.4 percent March increase. Machinery, up twenty-five of the last twenty-six months, had the largest increase, $1.1 billion or 1.6 percent to $65.2 billion. Inventories of manufactured nondurable goods, down two consecutive months, decreased $1.2 billion or 0.5 percent to $243.1 billion. This followed a 0.3 percent March decrease. Petroleum and coal products, also down two consecutive months, led the decrease, down $0.9 billion or 1.6 percent to $55.0 billion. By stage of fabrication, April materials and supplies increased 0.1 percent in durable goods and 1.2 percent in nondurable goods. Work in process increased 0.4 percent in durable goods and decreased 4.1 percent in nondurable goods. Finished goods increased 0.5 percent in durable goods and decreased 0.2 percent in nondurable goods.

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 Bureau 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. [note that graph below is updated through March 2012 data]

The same issues are also evident if manufacturing backlog is used as a recession gauge. [note that graph below is updated through March 2012 data]

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