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Let’s Get Real- Manufacturing Didn’t Suck But Construction Spending Did

Real Construction Spending- Click to enlarge

By now you have heard of the great news on factory orders and construction spending in July. Construction spending beat consensus expectations. The pundits had expected a 1% increase on the seasonally finagled headline number for construction and got 1.8%. The headline seasonally adjusted July increase in factory orders was a whopping 10.5%. Wall Street conomists had been expecting a slightly crazier gain of 11%. They knew about a big aircraft order that would skew this measure to unparalleled heights.

These data are not adjusted for inflation, so it’s enlightening to look at them on an inflation adjusted basis, and in the case of factory orders, backing out the transportation equipment orders to see what the rest of the manufacturing sector looked like.

As usual I looked at the actual, not seasonally adjusted basis and considered the actual trend, rather than an arbitrary seasonally adjusted, month to month number. Seasonally adjusted data usually comes fairly close to depicting the overall trend, but it is misleading often enough that I see no reason to use it when we can just as easily look at the actual data and see the trend in that without massaging the numbers to make the trend smoother.

First, construction spending rose just 1.8% on a year to year basis. The growth rate has been persistently cooling since January when it was a robust 8.7%. The dead cat bounce that began in 2011 is now approaching stall speed. God forbid the Fed should let interest rates on construction loans rise. Even with free money from the Fed, there’s hardly any demand for construction loans. They are still below the lowest levels of the 2002 recession, as well as below the level of July 2009, which most observers agree was the bottom of the “Great Recession.”

Real Construction Spending- Click to enlarge
Real Construction Spending- Click to enlarge

Real factory orders were better. They surged by 5.9% year to year, which was within the range of change of the past year. There’s no sign of slowing there yet. Real manufacturing orders are now back to the level of 2006, at the top of the housing bubble, but they’re still below the levels of 2007 and 2008, when the US economy was on the verge of collapse. Purchasers of manufactured goods hadn’t figured that out yet.

Real Factory Orders- Click to enlarge
Real Factory Orders- Click to enlarge

Dare I point out that the last two times manufacturing orders were this strong were at the top of a tech bubble and the top of the housing bubble?  That would be interesting enough, but the fact that it has taken 5 1/2 years of free money from the Fed to get this far is troubling.



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