Upward Revisions: Factory Sector Not So Bleak as Reported

Durable goods orders fell 0.5 percent in April but the prior month’s gain was revised higher. Similar upward revisions in the ex-transportation figures suggest the manufacturing sector’s struggles have been overstated.

Looking Better in the Rearview Mirror, but Road Ahead?

Amid recent headlines about the demise of the factory sector, the upward revisions to the prior month’s data call to mind Mark Twain’s famous response to the accidental premature publication of his own obituary, to which he remarked, “the details of my death have been greatly exaggerated.”

That is not to say that the current state of manufacturing space is without its challenges. To be sure, spending cuts related to mining and oil extraction have been a key weak spot with knock-on effects in other sectors. The April increases in categories such as fabricated metals (up 1.9 percent), primary metals (up 1.0 percent) and machinery (up 3.1 percent) is in each case a marked departure from repeated declines in prior months.

Aircraft orders lived up to its reputation for distorting the headline figures in April, as declines in military and civilian aircraft weighed on the headline and resulted in the negative print.

The back-to-back monthly gains in durable goods orders ex-transportation are consistent with the view we have maintained for months: that the factory sector is in large part being held back by one-off factors (unseasonably cold weather), supply chain disruptions (West Coast port shutdowns) and price dynamics (durable goods and factory orders are not adjusted for inflation and eight straight declines in producer prices held back orders).

Shipments data imply the West Coast port dispute was a bigger disruption than originally indicated. February's numbers were revised down sharply, helping to set up the upward revisions to March.

The challenge in parsing U.S. economic indicators in recent weeks has been to determine whether the soft start to 2015 was a function of “transitory factors,” as the April Fed meeting minutes observed, or a broader deterioration in growth fundamentals. In the first quarter, the U.S. economy eked out a scant 0.2 percent annualized growth rate. Later this week, the first revision to that Q1 figure may show an outright decline. In this environment, each new piece of Q2 data takes on greater significance. Data have been mixed so far. April figures for industrial production and retail sales were weak, but employment data and residential construction activity both notched respectable gains. Today’s durable goods report for April is an indication that the U.S. manufacturing sector was recovering as spring began.

Perhaps the most encouraging aspect of today’s report is that core capital goods orders increased 1.0 percent in April and were revised from a 0.5 percent decline to 1.5 percent increase in March. While the three-month average annualized rate is still weak, the back-to-back gains make the case for improvement in core business spending prospects.