Aerospace Dominates U.S. Factory Activity in September
The U.S. Department of Commerce reported on Friday morning that factory orders for durable goods increased 3.7 percent on the month in September to $233.4 billion, well above economist expectations for a 2.5 percent increase. Durable goods orders have increased for five out of the past six months, though generally at a modest rate. Orders increased 0.2 percent in August after a tremendous 8.1 percent plunge in July, and are now up 7.4 percent on the year.
The advanced durable goods report can be used as a leading indicator of factory activity, and can help provide insight into the overall health of the economy. Industrial production and capital spending are at the core of the manufacturing sector, and although its importance in the U.S. economy has diminished, manufacturing is still used as a bellwether for economic activity.
September’s data, though, is somewhat misleading. The majority of the 3.7 percent increase in orders can be attributed to a 12.3 percent jump in orders for transportation equipment, specifically nondefense aircraft and parts. Excluding transportation equipment, new orders for manufactured durable goods actually decreased 0.1 percent. By the same measure, year-over-year new order growth in September was just 5.6 percent, a deceleration from August’s 7.3 percent growth rate, and evidence that the manufacturing sector may stumble through the fourth quarter.
The Census Bureau’s manufacturing report is broken down into four primary segments: new orders, shipments, unfilled orders, and inventories. The new orders component is typically the headline citation and is arguably the best indicator of demand from the report.
The shipments component of the report can be used as a proxy for current demand. In September, shipments increased 0.2 percent. Total unfilled orders — a measure of backlog — increased 0.8 percent. Inventories increased 0.9 percent.
Data released yesterday appears to confirm what the durable goods report alludes to: a relatively weak October, negatively impacted by the 16-day partial shutdown of the U.S. government. Markit’s Flash U.S. Manufacturing PMI – which is an advance reading based on about 85 percent of total PMI survey responses — registered just 51.1 for the month, down from 52.8 in September.
“The flash PMI provides the first insight into how business fared against the backdrop of the government shutdown in October, and suggests that the disruptions and uncertainty caused by the crisis hit companies hard,” said Markit chief economist Chris Williamson. “The survey showed the first fall in manufacturing output since the height of the global financial crisis back in September 2009.”
Output — arguably the most highly watched component of the headline index — fell dramatically, from 55.3 in September to 49.5 in October, indicating contraction. The index for new orders declined from 53.2 in September to 51.6 in October, signaling reduced demand that could negatively impact the industry moving forward. Markit reports that a number of manufacturers linked lower output to the downward trend in new orders.
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