February 2013 Manufacturing Not Good Despite the Headlines

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US Census says manufacturing new orders improved in February. Our analysis this month showed “less good” and a near flat-line expansion of manufacturing year-over-year using the unadjusted data:

  • The downward trends in manufacturing new and unfilled orders continues.  We have had four months straight of literally no year-over-year growth.
  • The Industrial Production data and trends are inconsistent with Census Manufacturing.
  • Unfilled orders are still in a long term down trend – and this month’s growth was unchanged using year-over-year comparisons. Unfilled orders are a good litmus test for sector growth.
  • Most of the headline growth was in aircraft.

US Census Headline:

  • Manufacturing new orders up 3.0% month-over-month, and up 0.7% year-to-date.
  • Market expected month-over-month expansion of 2.5% to 2.6%
  • Manufacturing unfilled orders up 0.9% month-over-month, and up 1.5% year-over-year

Econintersect Analysis:

  • Manufacturing new orders down 1.3% month-over-month, and up 0.1% year-over-year
  • Manufacturing new orders (inflation adjusted) down 2.1% month-over-month, down 1.4% year-over-year
  • Manufacturing unfilled orders unchanged month-over-month, but up 1.5% year-over-year
  • As a comparison to the inflation adjusted new orders data, the manufacturing subindex of the Federal Reserves Industrial Production was unchanged month-over-month, and up 2.4% 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, one can see that transport (aircraft) pushed manufacturing performance this month. The graph below shows sector growth year-over-year.

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

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 under 1% – 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 (red line)

The health of manufacturing is gauged by the growth of unfilled orders. The rate of growth has been degrading for the last 12 months.

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

The downward trend in unfilled orders continues. A declining unfilled orders backlog 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 February, up two of the last three months, increased $14.5 billion or 3.0 percent to $492.0 billion, the U.S. Census Bureau reported today. This was at the highest level since the series was first published on a NAICS basis in 1992 and followed a 1.0 percent January decrease. Excluding transportation, new orders increased 0.3 percent.

Shipments, up five of the last six months, increased $4.3 billion or 0.9 percent to $489.3 billion. This was at the highest level since the series was first published on a NAICS basis and followed a 0.4 percent January increase.

Unfilled orders, up five of the last six months, increased $9.3 billion or 0.9 percent to $999.7 billion. This followed a slight January decrease. The unfilled orders-to-shipments ratio was 6.28, up from 6.25 in January.

Inventories, up three consecutive months, increased $1.1 billion or 0.2 percent to $620.0 billion. This was at the highest level since the series was first published on a NAICS basis and followed a 0.6 percent January increase. The inventories-to-shipments ratio was 1.27, down from 1.28 in January.

Keep the score on surveys, the all surveys except the Philly Fed and the Kansas Fed predicted expansion in February.

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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