Written by Steven Hansen
Manufacturing new orders is a disaster – even though it could be argued that the market expected this bad report. The data actually contracted in August 2012 – sales in August 2011 were 5.2% higher.
- something is amiss between the Federal Reserve industrial production data which has disconnected from the US Census data.
- unfilled orders declined 2.8% since last month – and unfilled orders remains a good recessionary litmus test.
- Manufacturing new orders down 5.2% month-over-month, and up 3.7% year-to-date
- Market expected month-over-month contraction of 5.5% to 6.0%
- Manufacturing unfilled orders down 1.7% month-over-month, and up 5.1% year-to-date
- Manufacturing new orders down 5.2% month-over-month, and down 2.8% year-over-year
- Manufacturing new orders (inflation adjusted) down 5.2% month-over-month, down 2.3% year-over-year
- Manufacturing unfilled orders down 2.8% month-over-month, but up 5.1% 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, it is clear the weakness this month remains transport. However, year-over-year growth has reversed to a short term improving trend (improving growth, positive 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 jumping between 1% and 8% for the last 12 months. The long term down trend since 2010 has been reaffirmed.
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 four 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 soften. 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 August, down two of the last three months, decreased $24.9 billion or 5.2 percent to $452.8 billion, the U.S. Census Bureau reported today. This followed a 2.6 percent July increase. Excluding transportation, new orders increased 0.7 percent.
Shipments, down two of the last three months, decreased $1.3 billion or 0.3 percent to $476.9 billion. This followed a 1.9 percent July increase.
Unfilled orders, down following two consecutive monthly increases, decreased $17.0 billion or 1.7 percent to $978.8 billion. This followed a 0.7 percent July increase. The unfilled orders-to-shipments ratio was 6.27, up from 6.23 in July.
Inventories, up two consecutive months, increased $3.7 billion or 0.6 percent to $611.8 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 July increase. The inventories-to-shipments ratio was up from 1.27 in July.
Keep the score on surveys, the all surveys excpet the Dallas Fed and Kansas Fed predicted contraction in August.
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.