Manufacturing drops 3.4% in December, global demand falling

For the fifth straight month, US manufacturing sector has slowed, according to the Department of Commerce. Overall orders for manufacturing dropped 3.4% in December, led by a steep drop in transportation. Even without that, orders fell by 2.3%, and the overall decline in November was adjusted downward to 1.7%:

New orders for manufactured goods in December, down five consecutive months, decreased $16.4 billion or 3.4 percent to $471.5 billion, the U.S. Census Bureau reported today. This followed a 1.7 percent November decrease. Excluding transportation, new orders decreased 2.3 percent. Shipments, down four of the last five months, decreased $5.3 billion or 1.1 percent to $488.2 billion. This followed a 1.0 percent November decrease. Unfilled orders, down following ten consecutive monthly increases, decreased $9.4 billion or 0.8 percent to $1,166.9 billion. This followed a 0.2 percent November increase. The unfilled orders-to-shipments ratio was 6.69, down from 6.81 in November. Inventories, down following eighteen consecutive monthly increases, decreased $2.0 billion or 0.3 percent to $653.9 billion. This followed a slight November increase. The inventories-to-shipments ratio was 1.34, up from 1.33 in November.

Durable goods dropped as well, by 3.3%:

New orders for manufactured durable goods in December, down four of the last five months, decreased $8.0 billion or 3.3 percent to $230.6 billion, revised from the previously published 3.4 percent decrease. This followed a 2.2 percent November decrease. Transportation equipment, also down four of the last five months, led the decrease, $6.7 billion or 9.1 percent to $66.8 billion. New orders for manufactured nondurable goods decreased $8.5 billion or 3.4 percent to $240.8 billion.

The news was a miss for economists, who predicted a decline of a smaller magnitude. Business investment also turned in a poor showing:

Economists polled by Reuters had forecast new orders received by factories sliding 2.2 percent. U.S. financial markets were little moved by the data.

Manufacturing is slowing, constrained by weak global demand and falling crude oil prices, which have caused some companies in the energy sector to either delay or cut back on capital expenditure projects.

Business spending on equipment in the fourth quarter was the weakest since mid-2009. The soft trend in business investment likely persisted early into the first quarter, with a report on Monday showing a manufacturing sector gauge falling in January. …

In December, factory orders excluding the volatile transportation category fell 2.3 percent, the biggest drop since March 2013, after declining 1.3 percent in November. In a sign of weakness, unfilled orders at factories slipped 0.8 percent, the first fall in 10 months.

The report isn’t horrid, and there is some context in the global economy that explains some of it. However, it’s becoming clear that the Q4 advance estimate released last week wasn’t a fluke in terms of dropoff in economic output. The slowdown began in Q3 but apparently picked up the pace in Q4, to the point where economists underestimated its scope. This report does not bode well for the next iteration of the GDP estimate due at the end of the month. That 2.6% might come down a bit.

On the other hand, while global demand has cooled for various reasons, US consumer demand remains high, up 4.3% in Q4. Inventories of durable goods went up in December, which might point to softening demand in that category, but overall inventories of manufactured goods went down (along with the backlog). Inventories of nondurable goods dropped 1.5%, and work-in-progress inventory dropped 1.1%. If demand stays relatively high, there will be pressure to gear up and place new orders soon. The only fly in the ointment is that business investment should be a leading indicator on confidence in that outcome, but it’s not perking up — at least not yet.

Overall, the lesson here is that the “robust recovery” has not yet arrived — and policymakers had better not base their projections on it arriving in the near future. Right now it appears that we’re still stuck in neutral.