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Wednesday, June 27, 2007

New Orders For Durable Goods

New orders for manufactured durable goods in May decreased $6.1 billion or 2.8 percent to $213.0 billion, the U.S. Census Bureau announced today. This followed three consecutive monthly increases including a 1.1 percent April increase. Excluding transportation, new orders decreased 1.0 percent. Excluding defense, new orders decreased 3.2 percent.
Nondefense new orders for capital goods in May decreased $6.5 billion or 8.3 percent to $71.8 billion.
This is an advance report; maybe it will get a little better on revision. Nondefense capital goods is considered an important number. In an attempt to assuage my anxiety, I resorted to the detailed numbers. If you go to the left on the link and click on the "highlights" for advance reports, you can download a more detailed version.

According to it, as of this release, YTD durable goods shipments decreased 0.2% compared to last year, while YTD new orders for durable goods increased 0.5%. That's on page 2, right at the top (of the pdf release).

The aircraft industry is still providing all the life in this economy; YTD new orders for nondefense aircraft and parts are up a staggering 28.3% compared to 2006 same period.

YTD new orders for nondefense capital goods are up 3.3%, whereas shipments declined .5%. But that number includes aircraft! Ex-aircraft, YTD new orders and shipments for nondefense capital goods declined 1.4% for both categories. So it really is aircraft that are providing the lift; aircraft orders fell sharply from April to May, which really seems to have produced most of the drop in new orders. From March to April, SA non-defense aircraft new orders declined 11%, and from April to May they declined 22.7%.

I always look at new orders for primary and fabricated metals, because those are used in heavy manufacturing and they often seem like leading indicator. Both declined from April to May, whereas they were positive from March to April.

Computers and related products new orders were up, but if you look at unfilled orders (page three of the pdf) they are down 11.6% YTD and the month-to-month decrease has been accelerating, going 6.4% > -4.9% > -13.5%. Inventory also increased, so not a lot of life there. Unfilled orders for capital goods are still rising, but this is the month-to-month trajectory: 2.6% > 2.3% > 1.2%. Inventories for capital goods rose again, but at the same rate (0.7%) as they did March/April.

Not a lot of strength here. Unfilled orders keep looking sharply positive by historical standards, but they never seem to translate to the type of activity that I would expect. I am beginning to believe this is because a lot of the domestic manufacturing still being done is produced by importing major parts and final assembly happening in the US. So new orders do not translate into the same type of broad manufacturing stimulus than they used to.

I'm guessing that:

(a)"unfilled order" is a measurement in dollar rather than units, and

(b)the dollar amount is for the complete product, rather than the value added by assembly (or whatever) in the US--hence, offshoring of components or raw materials will systematically change the ratio between orders and US manufacturing output.

...is that correct?
Yes, it is correct on both points. Trying to figure "real" shipments from totals given becomes harder and harder all the time because of the import situation. Inventory valuations are supposed to be given at current prices, so you have to be careful there. One good check is to follow the ISM Manufacturing commodities price trends. That will sometimes clue you in to a cost-produced increase or decrease.

There are other sources of error in this report which is why it is a better indication of trend than anything else. In general, this report can be overly positive in the beginning of a manufacturing slump because of the sampling used which concentrates on large companies (which often gain at the expense of smaller companies during a slump), especially if the smaller companies are facing high cost inputs and are less well-funded. But the opposite can be true as well. The survey is benchmarked each year to adjust for changes. Focusing on categories like metal and energy can sometimes clue you in to early trends that do not show up in the rest of the numbers because the sampling for that seems relatively stable.

Here is part of the survey description:
This survey provides statistics on manufacturers' value of shipments, new orders (net of cancellations),
end-of-month order backlog (unfilled orders), end-of-month total inventory (at current cost or market value), and inventories by stage of fabrication (materials and supplies, work-in-process, and finished goods). The M3 includes
approximately 4,200 reporting units. Units may be divisions of diversified large companies, large homogenous companies, or single-unit manufacturers in 89 industry categories. Due to the small monthly sample, these 89
categories have been combined into 59 publication levels. The survey methodology assumes that the month-to month changes of the total operations of those companies in the monthly survey effectively represent the month-to-month
movements of all establishments that make up the category. The current coverage levels in the survey show that reported data in the monthly survey represent approximately 62 percent of the shipments estimates at the total
manufacturing level. Data published represent manufacturing in a calendar month. The data collection is based on a voluntary survey authorized by Title 13 of the United States Code.

The data presented in this release are based on data obtained from a panel of 4,200 reporting units and provide an indication of the activity within the manufacturing sector. The results differ from what would be obtained from a
complete enumeration of all manufacturing companies. In addition, a different panel of 4,200 companies would yield different results. The M3 panel is comprised of companies with $500 million or more in shipments and a
limited number of smaller companies. From a statistical perspective, the panel is not a probability sample; therefore,
the sampling errors that are normally provided with sample surveys cannot be measured. Nonsampling errors are attributable to many sources. The use of company or divisional reports to estimate the monthly change for establishments is one source of nonsampling error. The use of primarily large companies to represent the month-to-month movement of all companies is another potential source.
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