U.S. Factory Orders Down - Don't Worry, This Is Just Boeing Again

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Includes: BA
by: Tim Worstall
Summary

If factory orders fall then we're worried - people ordering less is a sign of a coming recession, possibly.

However, if we know why orders are down - one single plant or company - then we're very much less worried.

The factory orders drop is to do with Boeing's ongoing troubles, not the economy as a whole.

Why Do We Look At All These Macroeconomic Numbers?

As investors we're trying to do two things. Firstly, make sense of what is happening in the economy around us, secondly, trying to game through what the authorities might do about anything. For example, and just an example, say we say that industrial activity was falling. That could - could - indicate a coming recession. So, we position ourselves one way. But then we think, well, what will the monetary and fiscal policy be to try and beat this recession? That might indicate another stance.

Or, even, we might find that the change in our number isn't to do with something in the economy in general - it's about one specific company, something that's not going to be changed by the policy mix.

Which is where we are today. Yes, a fall in factory orders is usually the sort of thing that would have policy makers sharpening their pencils. But we can actually see that this is largely about Boeing, therefore no policy change is likely.

So, What Are The Numbers?

Factory orders is another one of those calculations we use to try to see whether the economy is growing or shrinking. Too fast and we might see an interest rate rise to cool things off. A drop and maybe a cut, or a loosening of monetary policy at least. Either of which would change our investment stance quite a bit. So, we're seeing a fall in factory orders, here comes the Fed cut? Not so fast:

New orders for manufactured goods in April, down two of the last three months, decreased $4.0 billion or 0.8 percent to $499.3 billion, the U.S. Census Bureau reported today. This followed a 1.3 percent March increase. Shipments, down following two consecutive monthly increases, decreased $2.7 billion or 0.5 percent to $504.1 billion. This followed a 0.2 percent March increase.

In chart form:

Census - US factory orders (US Factory Orders from Census)

That's the Bare Numbers, But Is This A Problem?

To work out either whether there's a recession a'comin', or whether there's going to be a change in policy, we've got to drill down a little more into these numbers. Is this something due to a known and specific problem? Or are we talking about a general - if slight so far - slow down in the manufacturing economy. Moody's Analytics helps us out here:

Factory orders by sector - Moody (Factory Orders by sector from Moody's Analytics)

There we can see that the drop is in durables. And when we exclude aircraft much of the problem goes away. Which brings us back to the durables report from before:

And what is it that we know about aircraft at present? Well, the big shipper of non-defence aircraft is Boeing, isn't it? Who we know has something of a little problem at present.... Well, quite, who is going to order planes they can't actually use even if they could take delivery? We rather expect a certain hiccup in this number at present therefore.

A Diversion

But if we have all this information from the durables numbers, why do we need the factory orders one? The answer being that whatever the economic numbers are they've got to make sense. The thigh bone is connected to the economic hip bone if you like. The reason to look at different variants, different collection methods, different definitions, is that they should all be telling us the same story.

Paul Krugman has famously used the idea to rubbish one particular claim. That wages haven't risen with productivity. If this were to be true then the labor share of GDP must - note must - have fallen. It didn't, at least up until the late 90s when that wages/productivity claim was first made, therefore it's the claim that is wrong. Yes, it has since then so it might be right since then. But given that we're describing the same economy all our different numbers should be telling the same story. One that's wildly at variance must be suspect.

So What Are These Numbers Telling Us?

The durables, the factory orders, numbers are indicating that there's something of a slowdown in the manufacturing sector of the economy. Normally this would prep us for a change in policy. However, that deeper drill tells us that we're really talking about Boeing. That might tell us something interesting about Boeing's problems but not about the economy in general.

The Investor Takeaway

Sure, it's interesting to see how large Boeing is, problems in just the one company turn up in the national economic statistics. But the headline numbers would lead us to think there might be a change in policy coming. We would therefore need to position ourselves for lower interest rates, or at least looser monetary policy. Deeper drilling into the numbers tells us it's really about Boeing and the 737 MAX. Yes, a problem, but not one that's going to be solved by changes in macroeconomic policy. Thus we'd not expect such a change in policy at present.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.