January 2012 Manufacturing New Orders Now Growing Slower

Written by Steven Hansen

US Census says manufacturing new orders declined 1.1% in January 2012. Econintersect analysis shows new orders declined 2.7% month-over-month.

The data was distorted this time by weak sales by Boeing with accounts for almost all the decline (see caveats at the end of this post).

Regardless, of Boeing or the data coming in under expectations – it is hard to argue this sector is not growing based on the growth of unfilled orders.  The concern is a deteriorating rate of growth for new orders.  Inflation adjusted unfilled orders are now growing year-over-year demonstrating clearly an expansion is underway.

US Census Headline:

  • Manufacturing new orders down 1.0% month-over-month, and up 8.1% year-over-year
  • Market expected month-over-month contraction of 1.9% to 2.3%
  • Manufacturing unfilled orders up 0.6% month-over-month, and up 9.5% year-over-year

Econintersect Analysis:

  • Manufacturing new orders down 2.7% month-over-month, and up 8.1% year-over-year
  • Manufacturing new orders (inflation adjusted) down 2.1% month-over-month, up 2.7% year-over-year
  • Manufacturing unfilled orders up 0.3% month-over-month, and up 9.5% (inflation adjusted 4.1%) year-over-year

Manufacturing, although growing at a fantastic 8.1% year-over-year growth rate – when adjusted for inflation is growing only 2.7% YoY.

The unadjusted year-over-year new orders growth rate has been between 10% and 15% most of 2011,  but has now entered 2012 breaking out of the old channel to the downside.

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 4.1% – this is real growth finally grabbing hold.

The headlines from the press release:

Summary. New orders for manufactured goods in January, down following two consecutive monthly increases, decreased $4.8 billion or 1.0 percent to $462.6 billion, the U.S. Census Bureau reported today. This followed a 1.4 percent December increase. Excluding transportation, new orders decreased 0.3 percent. Shipments, up eight consecutive months, increased $4.1 billion or 0.9 percent to $463.6 billion. This followed a 0.8 percent December increase. Unfilled orders, up twenty-one of the last twenty-two months, increased $5.4 billion or 0.6 percent to $917.9 billion. This followed a 1.5 percent December increase. The unfilled orders-to-shipments ratio was 6.10, up from 6.04 in December. Inventories, up twenty-seven of the last twenty-eight months, increased $3.9 billion or 0.6 percent to $614.7 billion. This was at the highest level since the series was first published on a NAICS basis in 1992 and followed a 0.2 percent December increase. The inventories-to-shipments ratio was 1.33, unchanged from December.

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 December 2011 data]

The same issues are also evident if manufacturing backlog is used as a recession gauge. [note that graph below is updated through December 2011 data]

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