Factory orders declined slightly year-over-year in May 2016, the 18th contraction in the past nineteen months (the only positive was February and its 29th day). On a seasonally adjusted basis, factory orders fell 1% month-over-month to $455 billion. That was less than the $462 billion for March 2011 back when the end of QE2 was a topic for discussion, before the irreparable wholesale events later that year would alter the global economy. Factory orders in the adjusted series have been contracting on and off for 22 months, amazingly just shy of 2 years.
This is altogether something different than a business cycle. As suggested by the related durable goods series, the length of time for this slowdown into steady contraction precludes all but the most serious interpretation. It is not recession, though one still looks just as likely now as when the contraction started. It is also certainly not growth, leaving very little apart from secular stagnation properly (in my mind) understood.
During the dot-com recession, which was mild but in some ways extended and drawn out, factory orders declined for 16 months (SA). Inventory levels had increased relative to sales through the first months of the recessions, as is typical, before declining dramatically as production fell off. Inventory levels in 2014 also rose relative to sales but then kept rising even though factory orders, and factory production, began to steadily and in some months seriously reduce. Even after 22 months of decline, inventory levels at the manufacturing tier of the supply chain are inordinately greater now than when the contraction began – in sharp contrast to the dot-com recession which saw inventory levels slashed by the time of the trough in factory orders.
That means a total of more than four years in a pattern that does not resemble a business cycle – two (plus) years of notably slower growth in orders and production, followed by nearly two years in uneven but overall persistent contraction. Worse, all of this takes place after an unusually large reduction in activity during the Great Recession that the “recovery” never even came close to addressing.
Unlike the mid-2000’s, the relatively weak upswing cannot be blamed on offshoring. Instead, the mid-2010’s has found commiseration between domestic and overseas production, suggesting, strongly, that it is the global economy overall that has become intertwined with stagnation or worse.
It all points to something other than recession and typical business cycle, not just for 2015 and 2016 but really going back to at least 2007. The “goods economy” in the US and around the world is in recession, but in reality it has been off its recovery axis for more than four years. The catalog of causes that could even begin to explain such an incredibly lengthy malaise is exceedingly small and at the top of that short list is monetary contraction on a global scale.
That means largely the same as China’s PMI’s released last week; factory orders in the US suggest nothing has changed. The economic trend in 2014 transitioned from frustratingly slow and seemingly steady growth into slow and dangerously steady contraction. What we don’t know is exactly what comes next because there is no precedence in the post-war economy. As I wrote earlier today about China’s fundamental view and its relation to volatility, the continued deviation from any kind of cycle will likely continue to have further self-reinforcing effects on markets:
Funding markets are too, but they are undoubtedly much further advanced in the process. So long as the economy remains far from a growth path, regardless of specific cyclical circumstances like recession or not recession (there is too much emphasis in the mainstream especially on the latter), the funding/market re-evaluation must (can) only continue. Again, this is how it is supposed to work.
The more markets are captured by this uncertainty and fundamental re-evaluation, the more it will continue to strangle the economy – and so on and so on. At some point it stands to reason that the economy would, in a fit of cyclicality, actuate a clean, recessionary break but it has been nearly two years and two global liquidations already that haven’t yet shaken it loose. On the surface, that sounds like praiseworthy resilience, and it may be, but on the other hand the lack of progress against inventory imbalance really suggests an almost absurdity to the whole phase. Because of that, it appears far more likely that whatever comes next will be of the negative variety (either in continuation or to what might be the next and worse stage) than a switch to actual recovery.