Manufacturing May 2012 Looks Good, but …

Written by Steven Hansen

The data says Manufacturing new orders grew this month.  It even beat expectations.  Yet stepping back from the data:

  • the rate of growth of the data has been improving for the last 2 months – but it also remains at the bottom of the growth channel trend.
  • something is amiss between the Federal Reserve industrial production data which has been in an uptrend since the beginning of 2011, and the US Census manufacturing data which has been in a downtrend since early 2010.
  • unfilled orders has declined for three months.  This trend is unusual, and is normally indicative of an economic soft patch.

US Census Headline:

  • Manufacturing new orders up 0.7% month-over-month, and up 6.1% year-to-date (down from 6.6% originally reported for April)
  • Market expected month-over-month growth of 0.4% to 0.5%
  • Manufacturing unfilled orders statistically unchanged month-over-month, and up 8.2% year-to-date (down from 9.3% reported last month)

Econintersect Analysis:

  • Manufacturing new orders up 0.7% month-over-month, and up 4.0% year-over-year
  • Manufacturing new orders (inflation adjusted) up 2.2% month-over-month, up 3.1% year-over-year
  • Manufacturing unfilled orders down 1.2% month-over-month, and up 8.2% 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)

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

Year-over-Year Change Manufacturing New Orders – Unadjusted (blue line) and Inflation Adjusted (red line)

The inflation adjusted year-over-year manufacturing shipment growth rate has been hovering between 1% and 8% for the last 12 months. 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.

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

The health of manufacturing is gauged by the growth of unfilled orders.   The rate of growth has been degrading for three months (three months is a trend).

Unadjusted Unfilled Orders – Total Current Value (blue line, left axis) and Year-over-Year Change (red line, right axis)

As the data is beginning to decline. This 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 May, up following two consecutive monthly decreases, increased $3.3 billion or 0.7 percent to $469.0 billion, the U.S. Census Bureau reported today. This followed a 0.7 percent April decrease. Excluding transportation, new orders increased 0.4 percent.

Shipments, up five of the last six months, increased $2.3 billion or 0.5 percent to $476.0 billion. This followed a 0.2 percent April decrease.

Unfilled orders, down two consecutive months, decreased $0.4 billion to $984.4 billion. This followed a 0.1 percent April decrease. The unfilled orders-to-shipments ratio was 6.25, down from 6.33 in April.

Inventories, also down two consecutive months, decreased $1.4 billion or 0.2 percent to $604.5 billion.  The inventories-to-shipments ratio was 1.27, down from 1.28 in April.

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.

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