Factory Orders Shed Another 4.6 Percent as Business Spending Cools
Factory Orders Shed Another 4.6 Percent as Business Spending Cools
Orders at U.S. factories declined by another $18.7B in November - the fourth consecutive monthly drop. These declines indicate an even worse scenario for business spending than many initially feared. The collapse in prices of commodity-related goods is exacerbating already weak orders data for nondurable goods.
Businesses in Full-on Cost Cutting Mode not Just Paring Back
November’s decline of 4.6 percent in factory orders marks the fourth consecutive monthly decline and is a particularly troubling sign for fourth quarter business spending. In past cycles, a tough month for orders would typically be followed by some reprieve in subsequent months. We have stated previously that this recession will be the worst since the early 1980s, and we find the last time that orders declined four or more consecutive months was in that era. From August through December of 1981 orders contracted each month, but those declines were fairly modest compared to the drop-off in orders we are seeing today. The largest decline of the four months in 1981 was a decline of 2.3 percent. The smallest decline of the last four months was September’s decline of 3.1 percent. We have been calling for a contraction in fourth quarter business spending on the order of 12 percent, it now appears that may prove optimistic.
When it Rains, It Pours
Oil, gasoline and other commodities peaked in the summer and have been trending downward since. While that has provided a welcome respite at the pump for consumers, it is making the data appear worse in an already weak business spending environment. Even if the total volume of orders were unchanged, if the price of each unit is lower the result is a decline in the value of orders. This is most evident in orders for nondurable goods, where price declines are more readily apparent. November’s decline of 7.4 percent for nondurable goods orders is the largest monthly decline on record since the series was re-stated by the Department of Commerce in 1992.
Non-Defense Capital Goods Orders Ex-Aircraft
One glimmer of hope in this otherwise grim report is the increase in non-defense capital goods orders ex-aircraft. This series is generally considered to be representative of business spending and it posted a solid gain of 3.9 percent in November. Unfortunately there was a negative revision from the 4.7 percent gain first reported in the Durable Goods report published at the end of December.
Business Spending Outlook Looking Weaker
While we would not rule out an increase in orders in coming months, such a gain would likely be attributed to payback rather than a sign of strength. The inventory-to-shipments ratio has climbed from 1.26 to 1.41 since August, suggesting an unintended inventory build. Business owners appear to be in lockdown until they see signs of recovery. “Wait and see” are dangerous words for business spending.
Wachovia Corporation
http://www.wachovia.com
Disclaimer: The information and opinions herein are for general information use only. Wachovia Corporation and its affiliates, including Wachovia Bank, N.A., do not guarantee their accuracy or completeness, nor does Wachovia Corporation or any of its affiliates, including Wachovia Bank, N.A., assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, are for general information only and are not intended as an offer or solicitation with respect to the purchase or sales of any security or any foreign exchange transaction, or as personalized investment advice. Securities and foreign exchange transactions are not FDIC-insured, are not bank-guaranteed, and may lose value.
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