Factory Orders fell 0.1% in February, but all is not lost. While there's an inclination to fear the worst, given the latest turn in several forward looking economic indicators, our review of the latest manufacturing data does not have us up in arms, at least not immediately. However, don't get me wrong, the report does sound an alarm about the economy.
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Factory Orders Fumble in February
Factory Orders fell 0.1% in February, yes, but all is not lost dear friends. As we reviewed the economic report, which required plenty of coffee in this particular case, we found appeasing factors that quelled our concern a bit. With opening day baseball playing in the background, we reviewed the relatively bland economic statistics, so forgive me if I accidentally calculate an OBA in place of an inventory ratio.
What we found is that an upward revision to January's factory orders played against February's percentage change. January orders were revised higher, to 3.3%, from the 3.1% rate initially reported. Economists surveyed by Bloomberg were looking for a 0.5% increase for this reported month, so at least some of the difference between expectations (+0.5%) and the result (-0.1%) is explainable by the prior month revision. Furthermore, we would have likely had a positive change in February, instead of a negative change, if the revision did not occur.
Also quelling our concern is the fact that January orders were so strong, so that perhaps some of what might have been ordered in early February was instead called in at the end of January. This is the reason many economic data points review several months combined, and why some companies no longer offer monthly data. With that said, perhaps we should not have expected much from February, given January’s strength.
If we exclude the big-ticket transportation sector from the order data, we find new orders actually increased by 0.1%. The transportation sector posted a big new order decrease of 1.5% in February. Transportation has been down four out of the last five months. Durable goods orders, also down 4 out of 5 months, fell 0.6% after a 3.7% increase in January. Nondurables increased by 0.3%.
Shipments increased for the sixth consecutive month, growing by 0.3% in February. That's good news. Unfilled orders rose by 0.5%, but before you get antsy, realize that this data-point will increase when economic activity is on the rise. What should be concerning is that the Unfilled Orders–to–Shipments Ratio was up to 5.64, from 5.63. When the increase is not proportional, taking into account how proportions might change as the level of activity changes, that's when we raise an eyebrow (literally in The Greek's case). Inventories increased by 0.8%, but again, we need to look at inventory in proportion to sales activity. The Inventory-to-Shipments Ratio did rise though, to 1.26 from 1.25.
Taking a closer look at the industries measured by the report, we find interesting strength in several areas. Industrial Machinery Shipments, for one, posted very impressive growth, rising 16% in February. However, closer inspection shows a significant drop in January shipments that was basically made up for in February. The same thing happened in Farm Machinery, which was up 12.7% in February. This might be part of the reason Deere (NYSE: DE) was up 2.6% today.
Aluminum and Nonferrous Metals data seems to show an interesting growth trend, with shipments up 4.4% in February, following 2.6% and 3.8% increases in the prior two months. But how much of that do you think is due to price increase? I would say it's probably a significant reason for the growth here. Hey, that shouldn’t matter for Alcoa (NYSE: AA) though, when it reports results shortly, but it matters for the economy as it distorts the view of real growth. Alcoa's shares have been moving up heading towards its EPS report. We also saw Nondurable Farm Products post shipments increases, again likely on price change.
With regard to autos, shipments increased 1.6% in February, 0.2% in January and 0.1% in December. Shipments of Light Trucks and Utility Vehicles have also gained, rising 5.4%, 5.7% and 6.3% over the last three months. The report does not provide new order activity for these segments though. Noise will clutter automobile statistics in the months ahead though, due to the logistics nightmare tied to the disruption of production in Japanese plants.
As far as orders go, when excluding transportation, there is a noticeable decelerating trend over the last three months. The trend shows orders rose only 0.1% in February, down from 0.7% growth in January, which was down from 3.0% growth in December. That is concerning, and might be more than just a lull.
Aluminum orders gained 4.2% in February, with gains also posted in the two months prior. Mining, Oil Field and Gas Field Machinery Orders were up each of the last two months, rising 22.4% in February. Given the intensification of focus on energy independence, this is more good news for these machinery makers. Computers and Electronic Products Orders have hit a dry spell, sort of meandering around limbo, with orders up just 0.1% in February.
In conclusion, I would not be too worried about the month's decrease in order activity in February, due to its following such a strong January. However, the steadily slowing pace of order activity excluding transportation over the last three months might be a warning sign that the manufacturing strength that optimists keep pointing to might be pulled out from under them.
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