Economic Risk Imbalance Continues

Factory orders (unadjusted) in May 2017 were up 6% over those estimated for May 2016. The growth rate was better in that month compared to the one before, but not any faster than the rest so far this year. Year-to-date, factory orders are up just 4.8% from the first five months of 2016.

Seasonally-adjusted, the Census Bureau estimates that orders have fallen in the past two months, rather sharply in May. Without getting into the methodology, the differences can be reconciled as a possibly stalling rebound. The unadjusted series tells us that factory orders are up compared to last year, while the adjusted data suggests most or all of those gains occurred last year rather than of late.

We are moved to that conclusion even by the unadjusted annual gains. At just 6%, there is so far no actual, meaningful acceleration indicated. The condition is too much like 2014, and nothing like 2011. After contracting for an astonishing 22 straight months (and 23 out of 24), factory orders should be following a path more like the middle 2000’s.

There appears to be gathering a prominent “headwind” for industry, and manufacturing in particular. The auto sector may be undergoing a cyclical process, swinging from sustained solid growth to more uneven and uncertain conditions. With low sales prevailing again in June, what was once a unique source of positive expansion is already a small but significant drag.

The potential consequences of this development have even caught the attention of Federal Reserve officials, those who are typically surprised by these inflections (as they were in this case, what with a 4.3% unemployment rate inconsistent with flagging vehicle sales). In their June 2017 policy minutes, released today, the FOMC acknowledges:

Automakers’ assembly schedules suggested that motor vehicle production would slow in subsequent months, but broader indicators of manufacturing production, such as the new orders indexes from national and regional manufacturing surveys, pointed to modest gains in factory output over the near term.