The manufacturing sector is not quite on a roll despite the widespread belief in ISM reports and Fed regional activity reports that have been wildly off the mark.
Factory orders for May came in at -0.8% vs an Econoday consensus estimate of -0.5%. In addition, the commerce department revised April factory orders lower, from -0,2% to -0.3%.
Nonetheless, Econoday dug deep to find positives.
Forecasters thought factory orders would get a lift from nondurables but they didn’t as total orders fell 0.8 percent in May vs Econoday’s consensus for minus 0.5 percent. Nondurable orders, held down by weakness in petroleum and coal, also fell 0.8 percent as did durable orders where last week’s advance data showed a 1.1 percent decline.
But there are positives in today’s report and they include a small lift for core capital goods orders (nondefense ex-aircraft) which, boosted by a jump in mining equipment, rose 0.2 percent vs last week’s initial estimate for a 0.2 percent decline. A small plus is a 1 tenth upward revision to April which is now at plus 0.3 percent. Shipments for core capital goods, which are inputs into second-quarter business investment, are similarly revised upward, now at plus 0.1 percent and 0.2 percent in May and April.
Weakness in the report includes aircraft orders with both commercial and defense falling in the double digits in the month. Orders for motor vehicle & parts rose a very solid 1.2 percent though consumer goods fell 0.2 percent.
But manufacturing activity, as described in last week’s PMI manufacturing report, is no better than subdued as total shipments rose only 0.1 percent following no change and minus 0.2 percent in the two prior months. A clear negative is a 0.2 percent decline in unfilled orders. Inventories fell 0.1 percent following no change in April, keeping inventories-to-shipments steady at a lean 1.38 ratio that points, however, to a defensive outlook that won’t be helping second-quarter GDP.
There are bright spots in this report which overall, however, is consistent with a sector that is struggling to find momentum.
Shipments were up 0.1% but excluding transportation, shipments were down 0.3%. Nondurable goods shipments which account for about half of all shipments were down 0.8%. orders were likewise down 0.8%. These are strong signs of faltering consumer demand for junk.
Let’s hone in on transportation shipments.
Auto shipments were up in March, April, and May. What the dealers will do with those shipments is not a mystery. They will be forced to offer major discounts.
Light trucks, a category that includes SUVs, was up 4.5% but that is on the heels of a 2.9% decline in April and 1.5% in March.
Motor vehicle parts were up 0.3% and 0.9% in May and April respectively, following a 0.9% decline in March.
Dealers are undoubtedly sitting on inventory they will struggle to sell given simultaneous declines in consumer and rental company demand, increased sales of foreign autos, and falling used car prices.
How the BEA will value the build in dealer inventories remains a mystery.
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I see no reason to change my belief that the GDPNow and Nowcast models for second quarter GDP are too high. For discussion, please see Increasingly Confident GDPNow Estimate Way Too High.
Mike “Mish” Shedlock