March Factory Order Rebound Doesn’t Change Dismal Trend

by Lee Adler, Wall Street Examiner

New factory orders (actual, adjusted for inflation and not seasonally adjusted), which is a broader measure than durable goods orders because it includes non-durables, dropped 3.3% on a year to year basis in March. It was the 5th straight year to year decline. As the Fed inflates a stock market bubble, US manufacturing is shrinking.

Click to enlarge

I adjust this measure for inflation and use not seasonally manipulated data in order to give as close a representation as possible of the actual unit volume of orders and thus the actual trend.

Real new factory orders, NSA, were up 5.2% month to month. March is always an up month, rising in all of the prior 10 years. March 2012 saw a rise of 6.8%. In 2011 was it was up by 19.2%. The average March change during the previous 10 years was  an increase of 12.8%. This year’s number was worse than the average and worse than the last two years. In fact it was the worst March performance since 1998.

More important is the big picture trend and the response of manufacturing to Fed stimulus. After rebounding sharply from the 2009 bottom through early 2011, the trend then stalled. The annual growth rate has been in a downtrend since April of 2010 and has been zero or a negative number for the past year. Since the Fed started settling its QE3 MBS purchases in November 2012, this index has shown no material improvement. The money printing is not trickling into the manufacturing sector. The ISM data for April suggests that the factory data for that month won’t be much better. So don’t believe the hype about a return of US manufacturing. It ain’t happening, as the chart above makes clear.

Until 2010 manufacturing had tended to trend with stock prices, with both clearly reacting to Fed quantitative easing or tightening. In 2008, the Fed had begun to withdraw liquidity from the markets by shrinking the SOMA while conducting emergency lending operations to the banking and shadow banking structures. At the same time the Fed cut out the usual direct funding of the Primary Dealers. The end-around allowed the money to reach manufacturers while starving the securities dealers. There was a late burst of manufacturing activity.

Draining funds from the Primary Dealers caused the 2008 stock market crash, but because the Fed was flooding other financial structures with liquidity directly, manufacturing held up for a while. It finally succumbed when the Treasury crowded out the rest of the market in 2008 when it raised $800 billion in a short period of time in September-October 2008 for stimulus and TARP.

In 2011, manufacturing turned up in March, the usual peak month. That was several months after QE 2 started. I wrote last month,

“To be fair, we should give this data until March 2013 to see if it will respond to QE3-4.”

That date has passed and the US manufacturing trend has shown no improvement.

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