Economic Headwinds Slow Manufacturing Growth to a Crawl



Economic headwinds buffeting the U.S. manufacturing industry in July somewhat abated in August, according to an advance report from the U.S. Census Bureau. New orders for manufactured durable goods increased 0.1 percent on the month to $224.9 billion, exceeding expectations for a 0.5 percent contraction. The news follows a downwardly revised contraction of 8.1 percent, from 7.5 percent, in July, which was led by a tremendous decrease in the production of transportation equipment.

Orders for transportation equipment are often sensitive to short-term and seasonal trends, and are therefore volatile. Excluding transportation, new orders for manufactured durable goods actually declined 0.1 percent on the month, missing expectations for an increase of 1 percent. This indicates that not only did transportation equipment orders drive the decline in July, but the headline increase in August, as well.

Consistent with strong car sales, orders for motor vehicles and car parts led the August increase in transportation equipment.

The 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. Factory orders are broken down into durable and nondurable goods. Durable goods include items like primary metals, machinery, electronics, and transportation equipment; nondurable goods include items like food, beverage, tobacco, chemical products, and apparel.

Monday’s release was the advance issue of the manufacturers’ shipments, inventories, and orders report. The advance issue only includes data for durable goods. The full report, which includes data for nondurable goods, will be available October 3.

The shipments component of the report can be used as a proxy for current demand. Total shipments of durable manufactured goods in August increased 0.9 percent to $231.5 billion, a gain that follows two months of decreases. Total unfilled orders — a measure of backlog — once again edged higher and set a new record at $1.032 trillion.

Earlier in September, research firm Markit also reported that manufacturing growth eased in August in its latest U.S. Manufacturing Purchasing Managers’ Index. The PMI declined from 53.7 in July to 53.1 in August, still indicating growth, but at a slower rate than before. The decline was led by accelerating contraction in the stocks of purchases and stocks of finished goods components as firms reduced inventories. The backlogs of work component also fell into contraction between July and August.

Declines were also registered in major components like output and new export orders, which both expanded for the month, but at a slower rate than before. Input prices continued to climb, with increases in the price of raw materials like oil and steel, but overall inflation was below a recent peak seen in July. Responding to these price pressures, output prices increased more quickly, but, overall, movement was relatively slow.

Importantly, the new orders component increased, signaling expansion at a faster rate than before.

Markit chief economist Chris Williamson said in the report: “The downturn in the headline PMI is a disappointment, suggesting that there is a risk that the goods-producing sector is stalling. However, a more encouraging picture emerges if we look at the details. In particular, inflows of new orders — a useful guide to future production — are growing at the fastest rate for seven months. At the same time, inventories of finished goods showed the largest fall since 2009 as some companies reported that demand often exceeded production. Factories will need to ramp up production to replace depleted inventories given this order book growth.”

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