Friday, December 05, 2008

Factory orders drop 5.1 percent in October

Here is another statistic to show just how bad of a recession we are in. From MSNBC News:

WASHINGTON - Orders to U.S. factories plunged in October by the sharpest amount in over eight years as a deepening recession caused big cutbacks in demand for steel, autos, computers and heavy machinery. Analysts expect the weakness will continue for some time.

The Commerce Department reported Thursday that factory orders dropped 5.1 percent in October, the largest decrease since an 8.5 percent fall in July 2000.

It was larger than the 4 percent drop that economists had been expecting. They believe manufacturing will continue to be under pressure for many more months, reflecting a deepening recession that already is the longest slump in a quarter-century.

Graph showing factory orders dropping 5.1 percent in October. From MSNBC News.

This is a huge sign of just how bad the contraction may be on the U.S. economy. Factories produce goods for both businesses, to invest in modernizing and expanding their own capacity, and to retailers, who sell their goods directly to the American consumer. According to the MSNBC story, demand for non-defense capital goods fell by 5 percent in October. Capital goods are products that are not used for consumption, but rather are used to produce other goods and services. Machine parts for factories, or dump trucks for construction are considered capital goods. Capital goods are a good indicator on how the economy is growing, or contracting, because businesses order capital goods to expand their capacity. However, the demand by businesses ordering non-defense capital goods fell by 5 percent in October (These are goods that are not used in producing U.S. defense-related products and services). In other words, businesses are cutting back on their plans to modernize, or expand their capacity for production.

Orders for durable goods also fell by 6.9 percent, larger than economists' estimate of 6.2 percent. Durable goods are goods that are expected to last over time--at least three years. Examples of durable goods include cars, business equipment, home appliances, home furnishings, electronic equipment, housewares and such. Two examples of durable goods would be cars and home appliances. The MSNBC story reports that "U.S. auto sales plunged by 37 percent in November to their worst level in more than 26 years." With the credit crunch that has been taking place, Americans are not finding the credit they need to purchase new cars. And with the big plunge in U.S. auto sales, automakers are certainly cutting back in the manufacturing of cars. It is no wonder that the Detroit Big Three automakers are in Washington, asking Congress for a $30 billion bailout package. The transportation sector fell by a huge 11.2 percent, with demand for autos falling 2.8 percent, and commercial aircraft orders falling 4.8 percent.

The second interesting note on durable goods would be home appliances, furnishings, and housewares. These type of goods are purchased by American homeowners--dishwashers, stoves, and refrigerators, washers and dryers, furniture, televisions, and such. But with the subprime mortgage mess forcing more American homeowners underwater with increased mortgage payments, and banks getting stuck with even more foreclosed homes that they can't sell to cover their own losses, it doesn't surprise me that the demand for these goods have also fallen. According to the MSNBC story, furniture makers reported a 5 percent drop in demand, while computers and other electronic products fell 3.4 percent in October (Big screen TVs, for example, here). Americans purchase furniture to furnish their newly-purchased homes. But with the housing market in such a collapse, Americans are not buying homes, nor are they buying the furnishings needed for these homes. And this drop in durable goods is also reflected within the construction industry. Construction machinery dropped 25.6 percent, showing that the construction industry is still suffering from the housing disaster. And not only are the construction companies that build homes are not purchasing construction machinery, but they also not purchasing home appliances like stoves, ovens, dishwashers to install in their newly built homes. So we've got a ripple effect in the drop in home furnishing durable goods from both the American consumer and the construction industry.

The MSNBC story also reports that orders for nondurable goods, "such as food, clothing, paper goods and petroleum products, dropped by 3.4 percent, partially reflecting the big declines occurring in energy prices." Nondurable goods are goods that are used up only once, or last for less than three years. Gasoline is a non-durable good, and gas prices have dropped significantly, as the price of oil has fallen. On the non-durable goods, I'm wondering if we're seeing a combination of price deflation, caused by the drop in energy prices, on factories producing such nondurable goods, and a drop in the demand for such nondurable goods by American consumers. Retail sales figures are the weakest we've seen in 35 years. Americans are cutting back on shopping for goods--goods that I would say are nondurable goods. If retailers are having problems moving inventory off their shelves, then they are not going to be ordering more products from factories. And if factories are seeing their own profit margins being squeezed by a combination of falling energy prices, and falling demand for orders, then they are certainly cutting back on their production.

The conclusion here is that if factory orders have dropped significantly in October, then such factories are going to be cutting back on their production in November and December. And cutting back on production would also include laying off workers, which brings us into the 533,000 lost U.S. jobs in November. Demand has slowed for goods, resulting in the reduction of the supply of such goods. This is just another example of just how bad the U.S. economy is now contracting.

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