Manufacturers’ New Orders Under the Lens
by Annaly Capital Management
Yesterday the Census Bureau released manufacturers’ new orders, which is usually seen as a leading indicator for the US economy. According to a Bloomberg article titled Orders to U.S. Factories Increase in Sign of Sustained Recovery: “The 0.7 percent increase in bookings topped the median forecast of economists surveyed….” The 0.7% increase mentioned is a month-over-month figure, which is how this metric is typically reported. Below is a historical chart showing the month-over-month change in new orders, seasonally adjusted.
New orders is a volatile data series, even seasonally-adjusted. Not a lot of utility in this number, and yet there are several variables that are usually presented in this way: construction spending, business inventories, existing home sales, durable goods, and more. Last month’s result was a 0.7% decline, so it’s hard to say that this month’s 0.7% gain is a sign of anything at all, much less a “sustained recovery.”
Viewed through the right prism, there is still much to be gleaned from the data. Here’s how we look at it: absolute level, year-over-year change, and drawdown from peak. In the graph below, one can see the absolute level of seasonally-adjusted new orders over the last decade. The drawdown from the 2007 peak was dramatic, and the initial pace of recovery off the 2009 bottom was impressive. That recovery has begun to slow somewhat, which is consistent with other data. At $423.8 billion, we are at 2006 levels and more than 12% below the previous peak.
Next, we take a look at year-over-year percentage change, and the graph below illustrates the historically large year-over-year decline in new orders, followed by the equally large recovery.
Despite the impressive bounce back in year-over-year percentage terms, the recovery has still not been enough to regain its previous peak, as the graph below sets forth. This is turning into a very sluggish recovery. (Hat, tip to Calculated Risk for giving us the idea for this framework, which is similar to that blog’s widely imitated nonfarm payroll chart.) Manufacturers’ new orders is an interesting data series, buffeted by large changes in volatile defense spending and auto production. It is also useful, but looking at month-over-month data will just get you lost in the weeds.