US Manufacturing Sector Still in the Woods
The better-than-expected 2.5% increase in April Durable Goods Ex-Transports is a clear sign of resiliency in the US manufacturing sector, but a closer look at the data reveals US manufacturing is not out of the woods yet.
Durable goods inventories have risen 9 of the past 10 months and now total $328.6bln, the highest total since the data were first published in ’92. This build in inventories is a reflection of higher prices and a reduction in overall demand. Producers will continue to curb production to compensate for elevated inventories, which will lead to more job cuts going forward.
Unfilled orders for durable goods have increased 26 of the past 27 months and now stand at $804.5bln — is the highest total since the data first became available in ’92 but also reflecting higher prices. Considering the recent increase in inventories, the jump in unfilled orders is more likely a result of overall weakness in the manufacturing sector as opposed to backlogs in production.
Continued weakness in the US auto sector should keep dragging on manufacturing going forward despite the settled dispute between GM and American Axle. Motor vehicle shipments are down nearly 12% on the year.
On the bright side, a weak USD should boost the appeal of US durable goods abroad, however higher prices for metals, energies and imported inputs may mitigate this advantage.
While the better-than-expected April Durable Goods data are encouraging, downside risks still plague the US manufacturing sector, which likely has yet to hit a bottom in this recent downturn.