The headline number on durable goods orders was shockingly bad, which we all know is bullish. For a change the SA data wasn’t misleading. Underlying the seasonally massaged (SA) headline data (see Note below), the actual data, not seasonally adjusted (NSA), was just as bad. After backing out inflation, real durable goods orders continue to trend down, a fact that virtually no one in the mainstream media, Wall Street, or economic establishment is paying any attention to, partly because they think there’s no inflation. So we keep hearing BS about the US manufacturing renaissance when the reality is US manufacturing remains solidly entrenched in a secular downtrend with no sign of recovery.
New orders for manufactured durable goods in July decreased $17.8 billion or 7.3 percent to $226.6 billion, the U.S. Census Bureau announced today. This decrease, down following three consecutive monthly increases and followed a 3.9 percent June increase. Excluding transportation, new orders decreased 0.6 percent. Excluding defense, new orders decreased 6.7 percent.
Transportation equipment, also down following three consecutive monthly increases, led the decrease, $16.7 billion or 19.4 percent to $69.7 billion. This was led by nondefense aircraft and parts, which decreased $14.5 billion.
from Census Bureau
The consensus forecast was for a decrease of 5% according to Briefing.com. The market took the bad news on the economy as good news (at least in the initial reaction) because it was speculating that maybe the Fed won’t taper in September after all.
The headline data reflects the theoretical month to month change based on an arbitrary seasonal adjustment factor that will be adjusted multiple times to fit the curve to the actual data as more data comes in over time.
Adjusted for inflation and not seasonally manipulated, July orders fell 1.3% year over year. That compares with an 8.8% year to year increase in June. Transportation and defense orders are responsible for the volatility. The annual rate of change, while volatile, has been in a well defined downtrend since 2010. This deceleration has been consistent whether the Fed was actively pumping QE cash into the market, or was in a pause. After the initial rebound in 2010, the Fed’s money printing has had no discernible impact. This isn’t new. It’s part of a downtrend in US manufacturing that has persisted since 1999.
On the basis of actual, not seasonally adjusted data July is always a down month. The month to month change for this month over the prior 10 years averaged -15.4%. The current month had a drop of 19.4%. July 2012 was down only 11.1% and the July 2011 was down only 12.4%. This year’s performance was not only worse than the last two years, but worse than the average of the prior 10 years. Like the year to year data, that suggests a trend.
I don’t expect this news to have any effect on the money printing lunatics at the Fed. I believe that they have finally recognized and admitted that their delusion that QE would spur economic growth was just that, a delusion. They also are seeming to get it that QE is spurring asset bubbles, so I’m expecting a reduction in the rate of securities purchases that will bring the monthly totals more in line with net new monthly Treasury supply. That’s now in the neighborhood of $60 billion while total Fed purchases including MBS replacements are around $110 billion.
The Fed assuredly will not close that gap all at once, but I suspect that in September it will take a baby step in that direction. [I cover the data on the government’s revenues and Treasury supply along with the data on the Fed’s policy actions weekly in the Professional Edition Fed and Treasury updates.]
The stock market has been following the growth of the Fed’s balance sheet, just as Bernanke had ordered. But he’s had less success at getting US manufacturing on its feet. It has stalled out in spite of massive Fed money creation and a stock market bubble. The stock market has shown that it can go on its merry way higher for several years with little or no growth in manufacturing. Durable goods manufacturing makes up only 5-6% of the US economy. So it’s a good idea not to get hung up on durable goods orders as a stock market indicator.
Nominal durable goods orders including inflation apparently track with stock prices pretty well, but that simply camouflages the reality that manufacturing remains in a slow motion collapse while rising stock prices include inflation. But don’t tell the Fed or the “no inflation” crowd that. Their heads would explode.
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).
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