Oh how I wish new order data was price adjusted!
Yes, I know producer prices are producer prices and not order prices, but I needed to provide some price adjustment…Real total manufacturing orders have stalled and remain below prior historical peaks.
One of the big stories of the moment is the fall in inflation and producer prices have fallen heavily in the wake of declining oil prices.
If we use PPI prices as a rough gauge of real order prices we can see that while nominal orders have fallen heavily, it may well be that much of this is just a price adjustment….plus a reaction to 2014 summer highs. So we need to tread cautiously in reading too much into short term data.
Comparing 2014 to 2013 and 2012 we need to adjust for the fact the summer surge mat well have taken up a lot of latent demand capacity:
Nevertheless if we crudely adjust for inflation using the PPI we see that underlying trends are the weakest they have been since 2012. In fact when I look at the data 2012 seems a significant comparison…GDP was also weak during 2012.
On a long term basis, irrespective of price effects, manufacturing orders are weak and suggestive of global demand capacity issues.
In terms of a nominal shock this is close to pretty extreme movements and we will need to assess the price impact on demand and wages in next month or so.
And here we can see the impact of the summer 2014 surge in new orders:
Much of the surge was in transportation but we see that orders ex transportation have similarly declined but with less variance:
And again we can see the comparison with 2012:
And longer term trends are visually significant even if we have issues over inflation and the 2014 summer surge.
If we take out transport and defense we see a short term monthly rebound. The question is will this continue?
In this perspective it is plausible that underlying growth is much weaker than 2014 numbers but that new order demand outside defense and transport is stabilising:
If we look at smoothed data (average rolling 6 monthly average) we can see this weaker growth trend.
Motor vehicles and parts, if we ignore its debt financing, still appears to be one of the strongest components of the new orders report, albeit showing signs of levelling off.
Consumer goods orders look to be bouncing back, but again much of this could well be due to short term oil price impacts.
Consumer durable goods orders though not as weak overall orders and likely less impacted by oil price declines have shown a much weaker growth trend.
And of course, historically when we have this type of weakness in new orders interest rates have not been in the ascendant.