January 06, 2004

A Disappointing "New Factory Orders" Number

A disappointing "new factory orders" number for November:

New Orders for Factory Goods Sank in Nov: The fall reflected a revised 2.5 percent drop in orders for expensive, long-lasting durable goods and a 0.2 percent drop in goods expected to last less than three years. The report showed a decline in orders in several categories in November. Demand for transportation equipment tumbled 1.3 percent and orders for computers and electronic products plunged 10.7 percent. Orders of non-defense capital goods excluding aircraft, which economists use to gauge business spending plans, fell 5.1 percent.

One bright spot in the report was machinery orders, which climbed 2.1 percent. Excluding defense, orders were down 1.3 percent and excluding transportation, orders fell 1.5 percent...

Posted by DeLong at January 6, 2004 08:13 AM | TrackBack

Comments

Thank you very much,I like this website! Do it good.

Posted by: mark on January 6, 2004 08:25 AM

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"orders for computers and electronic products plunged 10.7 percent."

Ouch. A significant concern is whether IT departments are done catching up on their post-bubble deferred purchases. If they've decided they now have pretty much all the kit they need to do the job, it's bad news.

Posted by: Michael Robinson on January 6, 2004 08:35 AM

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Yes, yes. If you're making Humvees or tank ammo, you're in great shape. All I have to say is, if I ever get my hands on a dollar again, I'm going to hold on to it till the eagle grins.

Er, as the song goes, that is.

Posted by: John H. Farr on January 6, 2004 08:40 AM

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Yes, but we already knew most of this, from the gerbil goods report. The new thing was the 0.2% drop in non-durable goods orders. That isn't good news, but it isn't as bad as the drop in durables.

Posted by: K Harris on January 6, 2004 09:15 AM

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But what does it mean? I am sorry, but I am not an economist. I am trying to understand all the terms, but I really don't have a clue. Is there some site for laymen - I don't mean economics for dummies - that simply delineates the function of each particular indicator and the optimum ranges for said indicators? Are there any books that offer a good crash course.

I don't want to have to go back to school to understand the breakdown of the leading economic indicators. I don't trust many voices on the subject - complicated subjects are always spun by people with agendas. Can anyone help me?

Posted by: Scott fanetti on January 6, 2004 09:29 AM

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No Scott, the beauty of economics it that laymen are actually at an advantage.
They bring fresh ideas and genuine curiosity to a field that is plowed and plowed,...
deeper and deeper...
and still it is always surprising at what turns up. Throw your hat in --find out what underemployment is all about. Ok I retrack that. It is not always underemployment.

Posted by: calmo on January 6, 2004 10:13 AM

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So, are we seeing that the surge in durable goods orders from this summer was effected by the tax cut and re-financing? Now, the goods having been bought, is this the fall in demand we should have expected? Does this bode poorly for high enough GDP growth to spur job creation?

This recovery still bothers me quite a lot.

Posted by: anne on January 6, 2004 11:17 AM

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http://www.nytimes.com/2004/01/06/opinion/06KRUG.html

Rubin Gets Shrill
By PAUL KRUGMAN

Argentina retained the confidence of international investors almost to the end of the 1990's. Analysts shrugged off its large budget and trade deficits; business-friendly, free-market policies would, they insisted, allow the country to grow out of all that. But when confidence collapsed, that optimism proved foolish. Argentina, once a showpiece for the new world order, quickly became a byword for economic catastrophe.

So what? Those of us who have suggested that the irresponsibility of recent American policy may produce a similar disaster have been dismissed as shrill, even hysterical. (Hey, the market's up, isn't it?) But few would describe Robert Rubin, the legendary former Treasury secretary, as hysterical: his ability to stay calm in the face of crises, and reassure the markets, was his greatest asset. And Mr. Rubin has formally joined the coalition of the shrill....

Posted by: anne on January 6, 2004 11:24 AM

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The factory orders data are from November. The December ISM data (not hard data, but pretty good at getting the course of factory activity right) were hugely strong, with the headline index at a 20-year high, orders massive. The employment index was above 50 (signaling factory job growth - can you believe it?) for the second straight month. In addition, factory orders data have a pretty strong tendency toward a saw-tooth pattern. Two months up then one month down is a pretty good showing for factory orders.

Posted by: K Harris on January 6, 2004 12:10 PM

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I tend to agree with K harris that the monthly data is very noisy and it is best to use smoothed data. Moreover, the backlogs for computers & other IT rose and the backlogs data is more reliable. But, a 10% drop in computer orders is significant.

But if earnings are holding up the cap spending should be OK. But let me suggest another scenario. Note, it is just a scenario not a forecast. In 4th Q productivity is slowing down
to about 2% -- 4% real GDP and 2% hours worked.
At 2% productivity & 3-4% compensation, unit labor costs are up 1%-2% while pricing is up 1% - 2%. this means profit margins are not expanding in the 4th Q and 4th Q EPS could be disappointing. Cosequently, early in 2004 firms start cutting labor again in an attempt to regain productivity growth and expand margins. But this feeds back into slower growth of consumer spending and the overall economy goes back into stagnation.

comments ??

Posted by: spencer on January 6, 2004 01:02 PM

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Spencer,

The tricky part is the amount of growth in output and orders. ISM data make both look strong. If that is the case, managers trying to keep labor costs down may not need to lay off, just limit hiring. All a question of how strong demand is (of course) and of whether factory managers can continue pulling productivity rabbits out of worker hats.

Posted by: K Harris on January 6, 2004 01:25 PM

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http://www.nytimes.com/2004/01/04/business/yourmoney/04econ.html

The Joyless Recovery
By EDMUND L. ANDREWS

ROCKFORD, Ill.

THE stock market is surging and the economy appears to be booming, but Judith Pike is getting out of business. "I'm finished; I'm out of here," said Mrs. Pike, owner of Acme Grinding, whose customers have been vanishing and whose work force has shrunk from 40 to 4. Two days before Christmas, Mrs. Pike sold her business and more than 40 machines used to grind and finish metal parts. "It will be for pennies on the dollar," she said. "Less than what it cost to buy just one of these machines."

Considering that nearly every scrap of data suggests that the American economy has finally climbed out of the doldrums and is humming at its fastest pace in at least four years, Mrs. Pike's timing may seem unfortunate. But here in Rockford, and in the nation as a whole, factory owners like her have seen their worlds turned upside down. And their struggle goes a long way toward explaining why this continues to be such a joyless recovery.

More than 11,000 jobs have disappeared in and around Rockford in the last three years, and many of those are not expected to return. Motorola shut down a big repair plant not far from Mrs. Pike's company last year, eliminating more than 1,000 jobs, even as it invested $1.9 billion in a new electronics factory in China. Textron is closing several factories that make metal fasteners. And industrial parks are swimming in "for sale" and "for lease" signs.

"We've been through downturns before, but this time it's different," said Malcolm Anderberg, owner of Dial Machine Inc., which does contract manufacturing. "This time, the work is leaving the country, and it's not coming back." ...

Posted by: anne on January 6, 2004 01:27 PM

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K Harris

What a pleasure to read your comment!

Anne

Posted by: anne on January 6, 2004 01:29 PM

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Anne,

I blush! Thanks.

Posted by: K Harris on January 6, 2004 01:57 PM

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"but this time it's different,"

I'm always wary when I hear someone say this. Also, getting people to worry about what MAY happen years from now is pretty much a no-win scenario for any politician. People really only pay attention when things have reached a boiling point.

Posted by: William on January 6, 2004 02:17 PM

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K Harris: I don't think it's the hat that the increased productivity rabbit is getting pulled out of... ;)

Posted by: Ab_Normal on January 6, 2004 03:29 PM

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Thoughts about Walmart gift cards, from pre-Xmas chat, the people will be using them to buy the discounted merchandise, thus little profit for Wal-mart.

Posted by: big al on January 6, 2004 03:37 PM

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K. Harris:

Re: gerbil goods report

What is that? It's from your first comment.

Posted by: northernLights on January 6, 2004 05:13 PM

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The ISM data is a diffusion index, ie the percent reporting better verses worse numbers. It almost always gets the direction right, but the magnitutes are sometimes off. Interestingly, when you look in the report the vast majority of the respondents are reporting that orders, employment, demand, etc conditions are unchanged.
You are getting a modest increase in the number of people saying things are better and a slight drop in those saying things are worse and this is creating the change in the summary index. But if you look at the break down the bulk of the respondents report things are staying the same.
The orders of magnitude in all the questions is very similiar -- 65%-- 75% report conditions unchanged while the number reporting improvement
or worsening is in the teens. The number of those saying it is improving is rising and those saying it is worse is falling, but by very small ammounts.

Posted by: spencer on January 7, 2004 06:20 AM

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northernLights,

I was being flippant. Where I come from "durables" said really fast sounds just like "gerbils".

spencer,

All true enough, but my impression is that the ISM data almost always have most respondents showing no change. It is, after all, a monthly report. A reading of 54, say, which resulted from most respondents reporting some change from the prior month, would mean a great many firms reporting deteriorating conditions in a month in which overall activity in the factory sector improved. It's the same with every diffusion index. ISM's record is not flawless, but it is strong enough that a number of forecasters shade their bottom-up quarterly GDP forecasts depending on whether ISM points to GDP higher or lower in the quarter than the bottom-up forecast.

Posted by: K Harris on January 7, 2004 07:17 AM

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