Written by Steven Hansen
Manufacturing new orders improved in October – and well away from the contraction warning the data was giving last month. Our analysis this month is stronger than the headlines, but with some caveats:
- Even with the improvement this month, the downward trends in manufacturing have not been broken.
- The Industrial Production data is inconsistent with Census Manufacturing.
- unfilled orders are still in a trend trend – but statistically little different than last month. Unfilled orders are a good litmus test for sector growth.
- Manufacturing new orders up 0.8% month-over-month, and up 3.5% year-to-date (September was 3.3% year-to-date).
- Market expected month-over-month contraction of 0.1% to 0.5%
- Manufacturing unfilled orders up 0.3% month-over-month, and up 4.4% year-over-year
- Manufacturing new orders up 5.0% month-over-month, and up 5.2% year-over-year
- Manufacturing new orders (inflation adjusted) up 4.5% month-over-month, up 2.7% year-over-year
- Manufacturing unfilled orders down 0.6% month-over-month, but up 4.5% year-over-year
- As a comparison to the inflation adjusted new orders data, the manufacturing subindex of the Federal Reserves Industrial Production was down 1.3% month-over-month, and up 2.0% year-over-year.
Seasonally Adjusted Manufacturing Value of New Orders – All (red line, left axis), All except Defense (green line, left axis), All with Unfilled Orders (orange line, left axis), and all except transport (blue line, right axis)
From the above graphic, one can see that transport (aircraft) was the drag month-over-month. The data this month was much improved, but not good enough to break the down trend.
Year-over-Year Change Manufacturing New Orders – Unadjusted (blue line) and Inflation Adjusted (red line)
Now look at the manufacturing component of industrial production which monitors production. While it is true that these are slightly different pulse points (inventory not accounted in shipments) – they should not have different trends for long periods of time. In the last few months, both of the trends are less good (growing at a slower rate).
Comparing Year-over-Year Change – Manufacturing Industrial Production (blue line) to Inflation Adjusted Manufacturers Shipments (green line)
Using employment to confirm manufacturing growth says this industry is growing a little under 2% – whilst the rate of change is flat (rate of growth is constant).
Employment Growth – Manufacturing (Seasonally Adjusted) – Total Employment (blue line) and Year-over-Year Change (red line)
The health of manufacturing is gauged by the growth of unfilled orders. The rate of growth has been degrading for most of 2012 – although the October data has shown a slight uptick.
Unadjusted Unfilled Orders – Total Current Value (blue line, left axis) and Year-over-Year Change (red line, right axis)
The downward trend in unfilled orders was not broken by this month’s increase. A declining unfilled orders backlog could be a recessionary indication as unfilled orders generally decline in poor economic times.
The headlines from the press release:
New orders for manufactured goods in October, up three of the last four months, increased $3.8 billion or 0.8 percent to $477.6 billion, the U.S. Census Bureau reported today. This followed a 4.5 percent September increase. Excluding transportation, new orders increased 1.3 percent.
Shipments, up three of the last four months, increased $1.9 billion or 0.4 percent to $482.3 billion. This followed a 0.7 percent September increase.
Unfilled orders, up four of the last five months, increased $2.8 billion or 0.3 percent to $982.9 billion. This followed a 0.1 percent September increase. The unfilled orders-to-shipments ratio was 6.25, up from 6.24 in September.
Inventories, up four consecutive months, increased $0.5 billion or 0.1 percent to $616.0 billion. This was at the highest level since the series was first published on a NAICS basis in 1992 and followed a 0.6 percent September increase. The inventories-to-shipments ratio was 1.28, unchanged from September.
Keep the score on surveys, the all surveys except the NY Fed and the Philly Fed predicted expansion in September.
Comparing Surveys to Hard Data
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 new orders or unfilled orders generally correlates to the economy – but it is not obvious in real time whether a recession is imminent. So in context to economy watchers – manufacturing by itself cannot be used as an economic gauge.
Adjusted Value – New Orders (blue line) and Unfilled Orders (red line)
The same issues are also evident if manufacturing backlog is used as a recession gauge.