Factory orders declined rather sharply in June, offering more evidence that the (economic) summer might be upon us. It was not a surprise given that the flash durable goods estimate also for June already indicated as much, since durable goods provide a significant basis for factory orders. The unadjusted series showed a decline of 5.6%, the worst by far since last October. In the four months prior, factory orders were following the same spring pattern of at least less distressing contractions, including a positive number for February (though in relation to the extra calendar day) and nearly flat (-0.3%) last month (May 2016).
Seasonally-adjusted, factory orders had rebounded since February’s multi-year low of just $444 billion. Though economists and the mainstream were encouraged as orders rose to nearly $460 billion by April, sharp declines have now been registered in both May and June. The latest seasonally-adjusted estimate is almost back to February’s low, just $447 billion.
With the contraction in its second lap, factory orders in June 2016 were 8.5% less than June 2014. That is remarkable in several ways, not just in that an almost 9% contraction is similar in scale to the worst of the dot-com recession but more so in that it has been two years to realize it. Worse, however, is that despite two years of declines there is no end yet in sight for it. Inventory levels in all parts of the supply chain remain completely out of balance, similar only to the Great Recession.
During the 16 months of total contraction in factory orders from late 2000 through early 2002, manufacturing inventory, as inventory elsewhere, declined sharply in relation to manufacturing sales. As inventory rebalanced sufficiently factory orders began to rise again, indicating exactly why, despite the more recent spring ritual of more hopeful rhetoric surrounding everything, the “manufacturing recession” will likely only continue even after two years of it already.
And this is a global problem that, contrary to FOMC declarations, originates as much with US consumers as “overseas” turmoil or weakness. It has been that way for several years, as the goods economy in the US reflects and indeed synchronizes with foreign manufacturing and trade data.
Since factory orders, as orders for durable goods, are forward looking and are now moving down yet again in the familiar seasonal pattern, then we should start to see pressure in other parts of the economy and markets. It may be more damaging to the latter than the former, particularly since markets have in many ways been acting as if the spring habitual was a very real bottom indication for the US and global economy. But as China’s economic data has again started to disappoint, the confirmation in US manufacturing would be a stark rejoinder to that spring sentiment in revealing that it only applied, once again, to the months before summer.
So much of economic commentary like market trading, stocks in particular, has been predicated on the false assumption that because data or prices aren’t getting worse they must be getting better. If two years of uneven weakness spread not just through manufacturing data but even broad measures like GDP were not enough to thoroughly disabuse this theory, then “unexpected” infirmity will continue to haunt markets and media – especially as the summer rolls on.
This is the economy as it is, not the one that “should be”, and it is ugly and getting uglier more so now in lost time. The economy that “should be” is the one where QE is actually powerful monetary policy that produces real, positive effects. The ugly economy that we are left to experience is the one where monetary policy has nothing to do with the Federal Reserve, leaving economists mystified at what is truly and stunningly simple.
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