Manufacturing Activity Eases in July on Soft Demand

Manufacturing

Source: http://www.flickr.com/photos/usnationalarchives/

Economic headwinds buffeted U.S. manufacturing into contraction in July. According to a report from the U.S. Department of Commerce, new orders for manufactured durable goods decreased 7.3 percent on the month to $226.6 billion. The decline was led by a tremendous 19.4 percent contraction in new orders for transportation equipment to $69.7 billion.

Excluding transportation orders, which are often volatile, new orders decreased just 0.6 percent, a much more moderate though still unexpected decline. Economists were forecasting an increase of 0.3 percent for the month.

The evaporation of demand in July follows three months of new orders growth, although most of the previous increases were led by gains in orders for transportation equipment. On the year, total new orders are down 0.3 percent, and new orders excluding transportation are up 5.9 percent.

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 also broken down into durable and non-durable goods. Durable goods include items like primary metals, machinery, electronics, and transportation equipment; non-durable goods include items like food, beverage, tobacco, chemical products, and apparel.

Monday’s report 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 non-durable goods, will be available on September 5.

The shipments component of the report can be used as a proxy for current demand. Total shipments of durable manufactured goods in July declined 0.3 percent to $228.8 billion. Computers and electronics shipments led the decline, falling 3.2 percent. Total unfilled orders — a measure of backlog — increased 0.4 percent to about $1 trillion, once again setting a record for the highest level recorded. Inventories increased 0.4 percent to $379.1 billion, also setting a fresh record.

New Orders

Source: Data from the U.S. Department of Commerce

July’s data are not devastating, but they are a soft blow to a manufacturing sector that has struggled to stay on its feet recently. Last week, market intelligence firm Markit reported that its flash Purchasing Managers’ Index of manufacturing conditions in the U.S. rose 0.2 points to a five-month high of 53.9 in August, signaling that the sector is expanding at an even faster rate than before. The indexes for output, new orders, employment, output prices, and quantity of purchases all expanded at a faster rate in August than in July.

While the preliminary data are good, they’re not great. At 53.9, the manufacturing sector is expanding but only at a modest pace. The sector has consistently flirted with contraction in the wake of the crisis and will need to experience a longer period of more robust growth in order to fully heal and once again become a driving force behind the broader U.S. economy. The index for new orders, a proxy for demand, increased a full percentage point to 56.5. The employment index increased 0.2 points to 53.2.

“Hopefully the faster growth of new orders seen during August will translate into increasingly strong production gains in coming months, and also boost hiring,” Markit chief economist Chris Williamson said in a press release. “Job creation was the strongest for four months in August, but the sector is still barely contributing to non-farm payroll growth.”

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