US Factory Behavior Parallels Economic Slowdown

US factory data suggests that economic growth has slowed more than predicted during the first quarter. Order sheets show smaller quantities and business spending on capital goods has decreased. 

The Commerce Department announced this week that new orders for manufactured goods have declined by 1.7% as a result of decreasing demand. Such shrinkage has been reported during 14 of the past 19 months with a small 1.2% increase in January (downwardly revised from previously estimated 1.6%). 

February saw a 2.5% drop in orders for non-defense capital goods (not including aircraft). These “core capital goods” are viewed as a measure of spending plans and business confidence. 

“This morning’s report suggests a more sluggish manufacturing sector in the early part of the quarter,” says Barclays economist Jesse Hurwitz. Estimates for first-quarter GDP growth are currently sitting below a 1% rate. 

Economic growth slowed to a 1.4% annualized pace during the fourth quarter of 2015. This week’s report adds to weak trade and consumer spending data in suggesting further economic growth moderation. This data altered US government bond prices while the US dollar dropped to a 2-week low vs the Japanese yen. 

Manufacturing (roughly 12% of the US economy) has long faced pressure from a weak global demand and a strong US dollar, which have undermined exports of factory goods in addition to business owners’ efforts to reduce an inventory overhang. The sector has also been blasted by investment cuts by energy firms as they struggle to cope with smaller profits from cheaper oil. 

But the worst of it seems to be over, reports Reuters. “We remain hopeful for some upcoming improvement in the data as many of these headwinds have either passed or faded,” says economist Dan Silver of JP Morgan. 

A survey last week shows an expansion in manufacturing activity – the first in six months. The US dollar is bouncing back and the slide in oil prices seems to have slowed. “We have also been encouraged somewhat by some other more timely manufacturing indicators that have turned more mixed lately following a period of more widespread and severe weakness,” says Silver.