How Did Zombie US Durable Goods Manufacturing Beat Economists’ Expectations Again?

New orders for manufactured durable goods in February increased $12.4 billion or 5.7 percent to $232.1 billion, the U.S. Census Bureau announced today.  This increase, up five of the last six months, followed a 3.8 percent January decrease.  Excluding transportation, new orders decreased 0.5 percent.  Excluding defense, new orders increased 4.5 percent.  Transportation equipment, up two of the last three months, drove the increase, $13.3 billion or 21.7 percent to $74.4 billion.  This was led by nondefense aircraft and parts, which increased $9.0 billion.

from Census Bureau

The consensus of economic forecasters was for a gain of 3.8%. It looks as though the econoquacks underestimated the strength of the economy again, just like they’ve been doing  for the past 6 months.  But, alas, it’s not quite that simple. The old seasonal adjustment bugaboo is rearing its ugly head. The trend is far weaker than the blaring headlines imply.

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February Real Durable Goods Orders, adjusted for inflation and not seasonally manipulated, declined 0.8% year over year. That compares with a 1.6% year to year decline in January. It was the fourth month in a row that this number was down. Once is an anomaly. Twice could be a temporary blip, but 4 consecutive months starts to look like a trend. Furthermore, it was the 6th year to year decline in 7 months.

Real Durable Goods Orders Chart- Click to enlarge

Real Durable Goods Orders Chart- Click to enlarge

 

Note: In adjusting for inflation, this measure attempts to represents actual unit volume of orders. Also, the use of actual, versus seasonally adjusted (SA) data allows an accurate view of the trend. With SA data, this may not be the case, since SA data can overstate or understate the real underlying change by attempting to fit the data to a standardized curve. There are no such issues when using the actual data (see Why Seasonal Adjustment Sucks).

New orders volume remains well below the 2004 through 2007 levels. Those years were when the housing bubble was in full swing, but current levels of orders are even below 1998 through 2000 and 2001 through 2003 when the US was in recession after the internet/telecom/tech bubble collapsed. The economy may be growing in other areas, but  activity in durable goods manufacturing is still no better than the worst level of 2002.  This data has shown since 2011 that manufacturing in the US is not recovering.  We are producing less stuff today than five years ago and 15 years ago.

Because we are using actual, NSA data, to see how the sector performed on a short term basis it’s necessary to compare it to past Februaries. February is virtually always an up month versus January. The month to month change in February over the prior 10 years averaged +4.7%. This February had a gain of 9.6%.   That was better than the strong 8.7% jump in February 2012 and more than double the average February gain of the previous 10 years. In the short run, it was a good month. But the month to month data is always noisy and driven by temporary factors that may not repeat.  So it is always necessary to look at things in the context of the bigger picture, which is why longer term charts are so critical in understanding both the raw data, and the misleading headline data.

In spite of this month to month strength, on the chart you can see that the trend is still modestly negative. To be fair, let’s call it flat, but that’s a long way from the implications of massive strength implied by the news headlines today. The trend of US manufacturing looks dead in the water.

When the Fed looks at the inflation adjusted graphs of this data, it will only see more ammunition for the argument to continue its massive money printing campaign.

The stock market has shown that it can go on its merry way higher for several years with little or no growth in Durable Goods manufacturing.  That’s largely because this industry makes up only 5% of the US economy. So it’s a good idea not to get hung up on durable goods orders as a stock market indicator.  The market is always its own best indicator, but if you are looking for economic data that correlates well with stock prices, look at the Fed’s balance sheet and Industrial Production.

This report is excerpted and adapted from the permanent Durable Goods chart page. 

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