Despite several months of positive signs for an economic turnaround in a wide range of industries, new indicators for manufacturing activity have added a greater level of uncertainty to the pace and strength of the ongoing recovery. Overall demand for durable goods, which include automobiles, appliances and machinery, have unexpectedly declined, creating more doubt over the long-term prospects of a return to stability in the manufacturing sector.

According to the latest monthly report from the U.S. Department of Commerce, new orders for durable goods fell by $4 billion in August, reaching a total $164.4 billion. This represented a decrease of 2.4 percent from durable goods orders in July, which saw a 4.8 percent increase and the biggest gain in two years.

Much of the August decline can be attributed to a slowdown in orders for transportation equipment, which fell by 9.3 percent from the previous month, with orders for civilian aircraft alone dropping 42.2 percent following a 98.2 percent increase in July.

Although orders for machinery and primary metals rose by 0.7 percent and 1.9 percent, respectively, these gains were offset by decreases in computer products and electrical equipment. Orders for motor vehicles and parts saw a 0.4 percent increase.

The Commerce Department also reports that shipments for manufactured durable goods decreased by 1.4 percent in August (following a 2.2 percent rise in July), while unfilled orders decreased by 0.4 percent and inventories fell by 1.3 percent, the eighth consecutive month of declining stock levels. Non-defense orders for core capital equipment fell for the second consecutive month, dropping 0.4 percent, while shipments decreased by 1.9 percent.

"The disappointing report on August durable goods activity supports the belief that the emerging U.S. and global economic recovery will be weak and laced with uncertainty at least for the first year or two," Cliff Waldman, an economist for the Manufacturers Alliance/MAPI, wrote in an analysis of the report.

"Underlying the flat performance of total new orders excluding the volatile transportation category was sluggish activity in a number of key industry sectors that should by now be enjoying much firmer demand," Waldman added.

The expectation of steadier demand for manufactured goods meant that the August figures came as a surprise for many, especially considering the promising gains made in July. Economists recently surveyed by MarketWatch were predicting a 0.7 percent gain for orders and shipments in August. Similarly, the New York Times cited a forecast of 0.4 percent growth for durable goods, though the actual values of shipments and new orders fell far short of both estimates.

Although many industrial businesses have been increasing production and signs of a recovery for the sector remain widespread, according to the Times, "that recovery is likely to be jagged, marked by high unemployment and questions about whether consumer or business spending will bounce back or remain subdued."

The Associated Press also notes that "while the manufacturing sector has made gains, they're partly due to the Cash for Clunkers program that supplied buyer rebates but that ended last month."

A great deal of the stability for the industrial sector and the U.S. economy as a whole may depend on consumer confidence, which is a driving factor of sales and consumption. The Conference Board's latest Consumer Confidence Index, released yesterday, has fallen to 53.1 in September from 54.5 in August, signaling increased consumer apprehension regarding the short-term economic outlook.

Although the number of consumers who believe business conditions are "bad" rose from 44.6 percent to 46.3 percent in September, the number of people who claim conditions are "good" also rose, increasing from 8.5 percent to 8.7 percent, the findings show. According to the Index of Consumer Sentiment from Reuters/University of Michigan, optimism among consumers may have risen even higher. The Reuters/University of Michigan index indicates that consumer sentiment increased from 65.7 points in August to 73.5 in September, reaching its highest level since the start of 2008.

The future of durable goods consumption remains uncertain, and with consumer confidence in flux, it is unlikely that spending and demand will return to stable levels in the short term. Though most people agree we are in the midst of a recovery, Waldman explains, "the durability and contours of that recovery still remain in doubt."

Earlier: U.S. Durable Goods Orders See Largest Gain in Years

Resources

...Durable Goods Manufacturers' Shipments, Inventories and Orders: August 2009
U.S. Department of Commerce, Sept. 25, 2009

MAPI Analysis on Durable Goods...
Manufacturers Alliance/MAPI, Sept. 25, 2009

U.S. Durable Goods Orders Tumble 2.4% in August
by Rex Nutting
MarketWatch, Sept. 25, 2009

New Signs that Recovery May Come in Dribs and Drabs
by Jack Healy
The New York Times, Sept. 25, 2009

Disappointing Economic Data Signal Bumpy Recovery
by Christopher S. Rugaber
The Associated Press, Sept. 26, 2009

The Conference Board Consumer Confidence Index Dips in September
The Conference Board, Sept. 29, 2009

Recession Ends, but Recovery Will be Hampered by Weak Consumer Finances
Reuters/University of Michigan, September 2009