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Nothing Is As It Seems: Factory Orders and Unemployment
Everyone is pleased with the employment numbers that just came out today. Also, industrial production showed an increase. These numbers would indicate that we are well on our way to recovery, and I hope that is true. Many economists have hailed these reports as a clear sign that we are well on the way to recovery. I heard "Mr. Sunshine," Brian Wesbury of First Trust Advisors on the radio the other morning say that we are clearly in a "V"-shaped recovery.
Here is a typical reaction:
This is one of those game-changer reports that should fundamentally alter the perception regarding the economy. We have been steadfast in our belief that the labor market is stabilizing and that payrolls would turn positive around the turn of the year. It is safe to say that many if not most economists have been skeptical that the labor market would perk up, and the jump in the unemployment rate in October seemed to reinforce the negativity around the labor market. Today’s number was a little more and a little faster than we had expected, but it largely jibes with our broad evaluation of the employment picture. However, it should spark a much more significant re-assessment of the economic situation among market participants and the consensus at the Fed. –Stephen Stanley, RBS
But are these indicators correct? Do they signal a turnaround? Since I am accused of always seeing things darkly, I don't wish to be overly critical, but I don't think they are sending signals of a true recovery. Let's examine the reports.
Factory Orders:
Factory orders are a bellwether of future economic activity. Durable goods orders, those goods meant to last more than three years, actually declined 0.6%. Non-durable order went up 1.6%. But,
Bookings for capital goods excluding aircraft and military equipment, a measure of future business investment, decreased 3.4 percent, a bigger decline than the government estimated last week. Shipments of those goods, used to calculate gross domestic product, fell 0.3 percent, also a bigger drop that initially reported.
The media for the most part are reporting that factory orders went up 0.6% during October.
Why is this important?
Generally an increase in durable goods orders indicates what is called an increase in "higher" order production, or things like factory machinery that will make things for those producing non-durable goods, or "lower order" production such as for equipment that will make consumer goods.
Generally in a "real" economic recovery, i.e., one in which there is real economic growth, people cut back on spending, increase savings, which lowers interest rate. The economic signal sent by lower interest rates means that it is not economically worthwhile to produce consumer goods now since people aren't buying consumer goods. But since lower interest rates are attractive to some manufacturers, and since it takes a long time to make durable goods, it is a good time to make durables because by the time they are completed, consumers will be ready to buy and consumer goods manufacturers will need those machines.
It's clear that durable goods manufacturers aren't getting that signal. So, durable goods orders have declined while non-durables have increased. But, while non-durable numbers have increased, does it mean consumer goods manufacturers are increasing production in response to demand? Well, somewhat, since inventories in factories and stores is low. After all, people are still buying things, just not as much as before.
But it is clear that much of the increase in non-durables was due to higher costs. Non-durables such as oil and food have gone up in price sine the last report, so I would take these manufacturing numbers with a grain of salt.
This is textbook Austrian school economics of what happens when you apply Keynesian stimulus.
Unemployment:
It sounds good that unemployment levels are leveling off. Nonfarm payrolls fell by just 11,000 last month, way down from the 111,000 jobs lost in the prior month. The measure of unemployment used by the Department of Labor dropped to 10% from 10.2%.
But where are these jobs coming from?
Well, not from the industries we want to see grow. Construction employment declined by 27,000, manufacturing employment fell by 41,000, and information industry jobs fell by 17,000. These are real economic jobs governed for the most part by market forces.
Employment in professional and business services rose by 86,000 in November. Great more consultants and lawyers needed to keep up with regulation. Temporary help services accounted for the majority of the increase, adding 52,000 jobs. Since July, temporary help services employment has risen by 117,000.
We are also seeing huge growth in the health care and health services categories: 35,000. The health care industry has added 613,000 jobs since the recession began in December 2007. This is significant because much of this industry is directed by government through transfer payments. That is, much of this industry is supported by taxes rather than market forces. Not good. And, based on health care legislation, you will see even more growth in the health care industry in the future.
If you ask me, these numbers aren't that rosy. Unemployment seems to be improving, and I would guess it is, but not in the way that would bring real economic growth. Factory orders are mostly related to stimulus, not real market forces. These are signals that something is rotten underneath, and once the stimulus wears off, these numbers will regress.
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One last item on unemployment....
http://cohort11.americanobserver.net/latoyaegwuekwe/multimediafinal.html
Great L,
Thanks for this. I'm going to put it on The Daily Capitalist.
"But it is clear that much of the increase in non-durables was due to higher costs. Non-durables such as oil and food have gone up in price sine the last report,"
Bingo!
This is textbook Bernanke manipulation - he knows the economy is largely measured in USD, so knows that by killing the dollar he can make some numbers rise. What that means for the middle class is not his concern.
Do you think stagnant wages in the face of rising non-durable prices is a sustainable trend? I guess it is if we want 1/3 of the population on food stamps.
newest Factory Orders s.a. (MoM) (OCT) from Germany Actual -2.1% Forecast 0.8% Previous 1.3%
Still, although the fundamentals are bad, the stock market can still go up for a long time.
Gov'ts have learned some excellent lessons in control and manipulation. They probably cannot sustain "twilight zone" economies indefinitely yet but they are working up to it.
The printing presses are running my good man, the presses continue to run. Pricing of the risk assets merely marks the relative decline or, as in late last week and this week, no doubt (in order to cover the Treasuries being issued), the momentary and temporary ascent of the USD.
Average 485,000 unemployment filings don't equal -11,000 jobs. That is about 650,000 a month higher than when job growth is about 150,000 a month. Hiring is supposed to be poor at the present and I don't believe anywhere near boom time hiring has been prevalent in an economy where layoffs have been this high. I believe the government is hiding 5 million or more unemployed.
would someone please help me understand why the fuck a component which comprises only 19% of gdp - industrial production - causes so much excitement when it rises by a modest amount?
does anyone have a clue how much service and government sector production is changing - two components together which constitute 81% of gdp?
would not the 81% component have a higher weighting and more predictive power than one with 19%.
even if industrial production increased 1% over a year (compared to the 3-5
% decrease for 2009) that is .19% - not 19% - change in gdp. and people still want to wet their pants??
Someone has to produce something in order to generate taxes to support the government sector. I'm not denigrating service sector jobs, only those which relate to activities supported or sponsored by government. The government does not create wealth. It only spends it.
Preach on brother! Also of note most of the jobs created in the last decade were all in the public sector if you look at the way things have shaken out this decade. More tax feeders and more looting to be done. You would not believe how hard this is to describe to people. I know a fair number of people that think gov employment is productive and an economic god because "they pay taxes" they don't realize they don't pay taxes. The gov just takes back part of the pay they gave to them.
Very well put, and thank you.
Working in capital goods manufacturing sales in Chicago - orders are at the lowest point over the past 18 months. Lower than after 9/11.
I could use metrics of YOY sales, rate of sales, sales commissions, or sales backlog to support my comments... But it just becomes numbers and doesn't really explain the depth of what we're experiencing at our company and others selling capital equipment. It's beyond bad.
And now, after dying a death of a thousand cuts that was 2009, we stand at the brink of collapse of a 50 year old manufacturing company.
Thank you once again for your article, Econophile. It may not have been covered by main stream media, but your article, personally, helped with validation of what I'm experiencing.
Just wondering, does anybody have any good news? Everything I see shows no improvement, so I always appreciate the comments of others such as Jeff Lebowski. Curious if anybody is experiencing any upswing or, more importantly, signs of returning to 2007 levels?
The Annapolis Boat Show was the best in 20 years. Everybody buying.
the price?
Anon 154938: I'd need to see data to support that. We are intimately connected to the boat business, and I have seen not a peep of activity there, nor any reason to warrant further investment. Financing is a major consideration - floor plans for dealers have shrunk, etc. What kind of boats? Do you have any data?
Are you sure you didn't mean there were a lot of shoppers/lookers, as opposed to buyers?
I'm quite sure you are correct, anon 154938. The high end shopping center we visited last night (to return baby shower gifts to Pottery Barn) was completely packed.
In my opinion, indicative of the transfer of wealth. Barrington is number 6 in the nation - I have no doubt that the haves continues to distance themselves form the middle and lower classes. And if your metric is where the haves shop, things are as rosy as can be.
http://wealth.mongabay.com/tables/100_income_zip_codes-20000.html
To follow up my previous email, I have lead our sales department since 2005 and have included my numbers in relationship to company totals as follows:
2005 - $7.85 million of $28 million combined international and domestic total sales (indicated in shipments)
2006 - $8.5 million of $32 million total shipments (7 million dollar backlog entering 2006)
2007 - $9.9 million of $36 million total shipments (9 million dollar backlog entering 2007)
2008 - $8.9 million of $38 million total shipments (8 million dollar backlog entering 2008)
2009 - $2.5 million of $16.5 million total shipments (9 million dollars backlog entering 2009)
2010 - $142k of total $2.5 million total sales backlog
To put it into perspective, if we can remain solvent and I do not take further salary and commission cuts, I will make 18% of my salary in 2008. Not 18% less. Total.
It's too bad we didn't go public so we could issues more shares to strengthen our balance sheet.
Mr. Lebowski,
I sell services to capital equipment builders and I can confirm after hundreds of discussions with hundreds of machine builders that it is extremely bleak out there. If your revenues are off 50% you are doing great! Not unusal to hear of 70% declines in machine orders. I have heard that October was looking okay but November went into the toilet to douse any hope. Most revenue in the industry is coming from engineering and support services to retrofit existing equipment in the field (consumers are not the only ones getting creatively cheap).
See you at IMTS in September.
Our revenues were off 50% from 2008 - but off 70% from projections (side note - an MBA is not a replacement for real world experience for executive management). I think we fall right in line with what you're seeing. From reports of our vendors supplying us parts - we're probably doing as well, if not better, than other manufacturers in the private sector.
Falling revenues are difficult enough, but along with the decrease in revenues are decreases in margins as companies attempt to keep doors open. Our subsequent margins have fallen approximately 5-10% in the past 16 months.
The companies to which we supply capital equipment are either closing or consolidating. Inherent with the closings, equipment now becomes readily available for the consolidating companies.
Would look forward to seeing you at IMTS - but the truth is that I'm not entirely sure we'll make it to September if things do not change from the course we're on.
And now, I'll stop writing as I'm only upsetting myself further.
A great summary position piece and one of the best actual comments I've had the pleasure of reading.
Thank you for sharing your views, Econophile.
And, the Dude: I most certainly do abide.
Most people don't dig into the numbers so they consider it good news. The parasites on top don't care what kind of jobs are created. You heard Pelosi's insane chant "Jobs, jobs, jobs!". They could care less if it was producing cars or digging holes with shovels, it does not concern them. They only need the numbers to look good so they can get another term and continue the looting. Though I'll tell you more law jobs are not really being added. I'm in school for that now (but promise I will not practice) and from everything I read and see they are scaling back and only the brightest are getting firm jobs. So beware, in a few years there will be a veritable hoard of starving massively indebted lawyers running around looking to join in the looting.