Factory Orders, Too

By Jeffrey Snider

It stands to reason that if US demand for foreign goods is weak because of high inventory levels, then demand for domestic goods will be, too. As noted earlier, US imports are down this year after being substantially higher during the last half of last year. The same pattern to a varying degree is unsurprisingly being exhibited in the domestic factory sector.

Unadjusted, factory orders were up 5.8% year-over-year in August 2017. That’s slightly better than the average growth rate from 2014 and before, but not meaningfully different despite the sustained contraction in between.

Seasonally-adjusted, factory orders were subjected in June to another Boeing-related distortion as in the summer of 2014. Two months afterward, however, it is pretty clear that despite the one-time jump, order growth has like import growth stalled. The shift took place in March rather than January as for trade, but even so there is a marked difference in behavior.

Factory orders in August (SA) were essentially unchanged (+0.4%) from March. In the six months before that inflection, orders rose by just more than 5% (a double digit annual pace).

The likely reasons for the slowdown and really the end of “reflation” are exactly the same as described in explaining declining imports this year: high levels of inventory that remain because sales never really rebounded; spending remained weak because incomes never really rebounded; incomes remained weak because the labor market never really rebounded.

The unemployment rate never really factors given the 15 or 16 million left out of it, a result that isn’t surprising given how it behaved (dropping) while the economy fell to near recession. Instead, the (global) economy goes through these downturns and never really comes back from them. That’s now three of them in the space of ten years.

Given what we find here in factory orders and everywhere else as 2017 unfolds in the wrong direction, I have to believe the odds of a fourth are exceedingly high, certainly far, far greater than the odds of a merciful end to the trouble in actual recovery.

Relating that to monetary policy, the Fed is exiting its various programs not because things are about to get so much better but because they haven’t changed at all. There is simply nothing left for the Fed to do, a fact that took policymakers nearly a decade to realize. Just as their “stimulus” didn’t change anything, for the better or otherwise, removing it will, in my view, be just as forgettable.

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