Factory Orders for March came in at a seasonally adjusted headline number of a 2.1% monthly gain. That was in line with the Street consensus and a rebound from a drop of 0.1% in February. The pundits concluded that this would keep the Fed on track to raise rates this year. I have no quarrel with their conclusion. It’s just that the headline data does not tell the whole story, as usual. Here’s why.
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The Factory Orders Index is reported in nominal dollar terms, not adjusted for inflation, but seasonally adjusted. The seasonal adjustments are a guess based on past patterns, and they get revised multiple times in ensuing years, resulting in multiple revised estimates for several years after the fact. The mainstream media never reports that process of fitting the SA data to actual data over several years.
In order to get a handle on the actual trend of the volume of orders, I use the actual, not seasonally adjusted data (NSA), which I adjust by the CPI to obtain an estimate of the actual volume of orders over time. This is depicted in the chart below. I have plotted the real, NSA factory orders along with its annual rate of change and a graph of the S&P 500, so that you can compare the trend of factory orders to the stock market trend. The picture speaks for itself.
Real NSA factory orders had a nice gain in March, jumping 14.3% versus February. The 10 year average March gain is 12%, so this was a little better than average. It was also better than the March 2014 gain of 11%. It was driven by a big jump in Transportation Equipment orders, which is a large and highly volatile contributor to the total. EX Transportation Equipment, the gain this March was actually smaller than last March and slightly less than the 10 year average. Most importantly, total orders are down 3.3% year over year. The year to year change has been persistently negative since November, and at the weakest levels since the recovery began.
Meanwhile the stock bull stampeded on, as it has for 3 years while the US manufacturing sector had no growth. Can a bull market be sustained on the basis of free money, financial engineering, and the resulting services sector growth alone? A similar divergence persisted for about 2 years before stocks succumbed late in 2007. But they did not succumb until the Fed stopped growing its balance sheet that year.
The current milieu is another instance of being in uncharted waters. When the Fed and its cohort central banks finally withdraw their pumping of the markets, we have to wonder what the market response will look like. If the 2007-09 experience is prologue, it won’t be pretty.