Manufacturing New Orders Remain Soft in September 2012

Written by Steven Hansen

Manufacturing new orders continues to be soft – and very close to contraction. The unadjusted data is giving an entirely different conclusion than the seasonally adjusted data – but both agree that September is better than August.

  • Both Industrial Production and this manufacturing data are in a down trend (rate of growth is less good).
  • unfilled orders grew this month marginally – but the year-over-year growth has declined from 10.0% in January 2012 to 4.5% with this September data.  Even though unfilled orders grew, they grew at a much slower rate than the same period last year.  Unfilled orders are a good litmus test for sector growth.
  • literally the aircraft sector drove “growth” this month

US Census Headline:

  • Manufacturing new orders up 4.8% month-over-month, and up 3.3% year-to-date (August was 3.7% year-to-date).
  • Market expected month-over-month growth of 4.5% to 5.0%
  • Manufacturing unfilled orders up 0.2% month-over-month, and up 4.5% year-over-year

Econintersect Analysis:

  • Manufacturing new orders up 3.0% month-over-month, and up 0.3% year-over-year
  • Manufacturing new orders (inflation adjusted) up 2.4% month-over-month, down 1.7% year-over-year
  • Manufacturing unfilled orders down 0.6% month-over-month, but up 4.5% 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 tailwinds provided by the transport sector. However, year-over-year growth is clearly in a “less good” trend. 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.  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

The health of manufacturing is gauged by the growth of unfilled orders. The rate of growth has been degrading for most of 2012.

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 September, up two of the last three months, increased $22.0 billion or 4.8 percent to $475.4 billion, the U.S. Census Bureau reported today. This followed a 5.1 percent August decrease. Excluding transportation, new orders increased 1.4 percent.

Shipments, up two of the last three months, increased $4.1 billion or 0.9 percent to $481.3 billion. This followed a 0.2 percent August decrease.

Unfilled orders, up three of the last four months, increased $1.7 billion or 0.2 percent to $981.0 billion. This followed a 1.7 percent August decrease. The unfilled orders-to-shipments ratio was 6.24, down from 6.28 in August.

Inventories, up three consecutive months, increased $3.7 billion or 0.6 percent to $615.7 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 August increase. The inventories-to-shipments ratio was 1.28, unchanged from August.

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

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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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