Manufacturing Better Than Many Think in March 2012

Written by Steven Hansen

US Census says manufacturing new orders declined 1.5% in March 2012, and Econintersect analysis shows new orders declined 11.8% month-over-month.  Yet stepping back from the data – neither analysis method likely yields the correct understanding of the situation.  This month had the perfect storm of unusually strong data one year ago, and last month as well, which plays into the Achilles heel of any evaluation methodology.

This is a record current dollar new orders for Marchs – and the first record new order month since 2008.  The drag in new orders was civilian aircraft which accounts for all the theoretical “less good” numbers.  But overall everything seems weak when compared to both last month’s and last year’s data.

Econintersect analysis of unfilled orders showed unfilled order growth, but the rate of improvement from last year was down slightly.

US Census Headline:

  • Manufacturing new orders down 1.5% month-over-month, and up 7.8% year-to-date (down from 10.9% in February)
  • Market expected month-over-month decline of 1.8% to 2.5%
  • Manufacturing unfilled orders up 0.1% month-over-month, and up 9.7% year-to-date

Econintersect Analysis:

  • Manufacturing new orders down 11.8% month-over-month, and up 2.3% year-over-year
  • Manufacturing new orders (inflation adjusted) down 11.6% month-over-month, down 2.3% year-over-year
  • Manufacturing unfilled orders down 1.1% month-over-month, and up 5.1% year-over-year

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

The unadjusted year-over-year new orders growth rate has been between 10% and 15% most of 2011, and growth has returned to this range.

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%).

The headlines from the press release:

New orders for manufactured goods in March, down two of the last three months, decreased $7.1 billion or 1.5 percent to $460.5 billion, the U.S. Census Bureau reported today. This followed a 1.1 percent February increase. Excluding transportation, new orders increased slightly.

Shipments, up ten consecutive months, increased $3.3 billion or 0.7 percent to $466.2 billion. This followed a 0.1 percent February increase.

Unfilled orders, up twenty-three of the last twenty-four months, increased $0.5 billion or 0.1 percent to $930.6 billion. This followed a 1.2 percent February increase.  The unfilled orders-to-shipments ratio was 6.17, down from 6.24 in February.

Inventories, up twenty-nine of the last thirty months, increased $1.9 billion or 0.3 percent to $618.4 billion.  This was at the highest level since the series was first published on a NAICS basis in 1992 and followed a 0.3 percent February increase. The inventories-to-shipments ratio was 1.33, unchanged from February.

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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