The larger-than-expected increase in new orders for durable goods has economists believing the worst is over even though the recovery will be slow.

For the first time in seven months, the nation’s overall economy grew despite a contraction in the manufacturing sector. According to the May manufacturing Report on Business from the Institute of Supply Management (ISM), the purchasing managers index (PMI) registered at 42.8 for May, 2.7 percentage points higher than April’s PMI of 40.1.

Although still below 50 and therefore signaling a contraction, a PMI above 41.2 percent over time signals an expansion of the overall economy. “If the PMI for May is annualized, it corresponds to a 0.5 percent increase in real GDP (gross domestic product) annually,” explains Norbert J. Ore, chair of ISM’s Manufacturing Business Survey Committee.

Moreover, May is the first month that showed a growth in new orders since November 2007. ISM’s index of new orders registered at 51.1 percent in May, a 3.9 percent increase over the 47.2 percent registered in April. Having the new orders index above 48.8 percent over time is generally consistent with an increase in the U.S. Census Bureau’s series on manufacturing orders, ISM says.

Not surprising then, the Census Bureau‘s latest report on manufacturers’ shipments, inventories and orders showed a larger-than-expected increase for manufacturing orders. Following a sharp decrease of 2.1 percent in March, new orders for manufactured durable goods in April increased by $3 billion (1.9 percent) to $161.5 billion, the Census Bureau announced on Thursday.

The median estimate of the economists surveyed by Bloomberg News was a rise of only 0.5 percent for new durable-goods orders.

“By some measures, a sharp decline in industrial output and business activity is beginning to level off,” the New York Times reports economists as having said. “Manufacturers say their outlook is improving slightly, and sharp declines in industrial production have decreased this spring.”

According to the Federal Reserve, industrial production decreased by only 0.5 percent in April after having fallen 1.7 percent in March. Manufacturing production declined just 0.3 percent in April after falling 2.1 percent in March.

The pace of contraction seems to be slowing overall.

A rebound in automobile orders and defense spending in April spurred the second increase on durable-goods orders in the last three months, Bloomberg News says. While non-defense orders for capital goods decreased $1 billion (2 percent) to $49.5 billion, defense new orders of capital goods increased $2 billion (23.2 percent) to $10.8 billion.

However, Cliff Waldman, economist for the Manufacturers Alliance/MAPI, reminds people not to be too enthusiastic. While the growth in April was significant, it was still almost 46 percent below last year’s levels. New orders for non-defense capital goods, “a proxy for business equipment spending,” was 24 percent below year-ago levels, Wildman
writes in an analysis of the Census Bureau’s findings.

“There really is no reason now to expect capital goods to be picking up,” Mickey Levy, chief economist at Bank of America Corp., told Bloomberg Television. “What we can hope for in the second quarter is a lesser decline than in the first.”

Bloomberg News adds, “[W]hile the pace of the economy’s contraction may be easing, there’s no signal yet that it is ready to grow. Rising unemployment will keep consumer spending in check.”

According to the Census Bureau, shipments of manufactured durable goods in April, already been down nine consecutive months, fell again by $0.3 billion (0.2 percent) to $174.2 billion. This is the longest streak of consecutive decreases since the series was first published in 1992.

“We have a tough slog ahead of us,” Carl Riccadonna, a senior U.S. economist at Deutsche Bank Securities, told Bloomberg News. “The recovery is going to be very slow in its emergence.”

Still, despite the caution, there are pockets of positive numbers. Along with the increase in durable-goods orders, inventory levels are also improving. Supply chains are starting to free themselves of excess inventories as nine of the 18 industries surveyed by ISM reported their customers as having inventories that are “too low.”

“The absolute worst is over, but what we have now is still quite bad,” Ian Shepherdson, chief U.S. economist at High Frequency Economics, wrote in a research note (via the New York Times). “Just about the only thing we can say with real confidence is that the headlong plunge in orders after the Lehman bankruptcy is over.”

Although the journey to recovery will be tough, increasingly more signs are suggesting that at least the worst has come to pass.

Resources

May 2009 Manufacturing Report on Business
Institute of Supply Management, June 1, 2009

Manufacturers’ Shipments, Inventories and Orders
U.S. Census Bureau, May 28, 2009

Industrial Production and Capacity Utilization
Federal Reserve, May 15, 2009

U.S. Manufacturing Orders Rose Sharply in April
by Jack Healy
The New York Times, May 29, 2009

U.S. Economy: Durable-Goods Orders Near 13-Year Low
by Courtney Schlisserman and Shobhana Chandra
Bloomberg News, May 28, 2009

MAPI Analysis on Durable Goods: ‘Worst May Be Over’ For Sharp Contraction
by Cliff Waldman
The Manufacturers Alliance/MAPI, May 28, 2009