Thursday, March 25, 2010

Manufacturing Numbers Show Positive Signs For Economic Growth

Although not as strong as January, February was the third consecutive month of increasing orders for durable goods, indicating that the industrial sector of the economy is truly moving into recovery. Although durable goods orders tend to signal increasing optimism about the economy moving forward, it still remains to be seen when it will begin to positively affect the labor market. See the following post from The Capital Spectator for more on this.

This morning’s update on new orders for durable goods reminds that the cyclical forces of recovery are bubbling. It’s still unclear how deeply and how soon the recovery will spill over into the labor market. As long as that uncertainty persists, there's some doubt about strength of the economic rebound overall. Meantime, it’s clear for the moment that the trend in the manufacturing sector continues to claw its way back from the steep losses of 2008.

New durable goods orders on a seasonally adjusted basis rose 0.5% in February, the government reports. That's well below January's 3.9% surge, but for the last three months this series has posted gains. Excluding the volatile transportation sector, new orders increased 0.9 percent in February; and if we ignore defense, the jump was even higher last month at 1.6%.

Three straight months of gain, along with substantially higher levels of new orders vs. a year ago, is an encouraging sign for the industrial corner of the economy. "Orders are generally believed to be a front runner for activity in the manufacturing sector because a manufacturer must have an order before contemplating an increase in production," explains Brian Kettell in Economics for Financial Markets .

Although the monthly reports for this series are notoriously volatile, the broad trend offers convincing clues for what lies ahead. By that standard, the ongoing rise over the past year suggests the rebound in manufacturing is more than a quirk. As our chart below shows, new orders for durable goods last month were nearly 11% higher compared with the level in February 2009. That's the biggest year-over-year gain in nearly four years (based on monthly data).

"Persistent strength in durable goods orders should be taken as a sign that both consumers and businesses are confident enough in the economy to engage in spending on big-ticket items," writes Pimco's Tony Crescenzi in The Strategic Bond Investor.

It's still debatable if durable goods orders are truly on a "persistent" uptrend, although the case for thinking optimistically is a bit stronger in light of today's report. "The business sector has been the strongest piece of the U.S. economic backdrop, an encouraging indication that the seeds of an organic growth dynamic are taking root and the recovery will continue," according to Julia Coronado, senior economist for BNP Paribas, via

And Bloomberg News reports today:

Business spending on new equipment, inventory restocking and a pickup in global demand mean companies from Boeing Co. to Owens-Illinois Inc. can look forward to sustained sales gains. A pickup in employment is needed to broaden the expansion as the economy heals from the worst recession since the 1930s.

"Businesses are ready to invest not just in inventories, but in equipment as well,” said Lindsey Piegza, an economist at FTN Financial in New York, who accurately anticipated the gain in orders. “These will be some of the key drivers of growth going forward."
But while the industrial sector continues to improve, it's still unclear how soon the recuperating process will spill over into the labor market. Either the recovery in manufacturing helps nurture an expansion in job creation, or the weak labor market puts a lid on the incipient mending in the industrial sector. Today's news on durable goods, along with other positive signs, indicate there's reason to stay optimistic in spite of the rough period of late in the labor market, as we discussed here and here, for instance.

The next installment of confirmation (or not) that the long-awaited rebound in the labor market is here arrives with tomorrow's news on initial jobless claims, followed by next week's update on nonfarm payrolls for March.

This article has been republished from James Picerno's blog, The Capital Spectator.

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