Industry Crib Sheet: Strong Factory Orders Hint at Economic Momentum
August 11, 2014
Orders to U.S. factories for manufactured goods rebounded in June with a 1.1 percent rise in new bookings following a 0.6 percent decline in May. Led by demand for electrical equipment and appliances, machinery, and defense aircraft and communications equipment, durable goods orders to U.S. manufacturers leaped 1.7 percent, while orders for core capital goods, a marker of business investment, surged 3.3 percent.
The heady numbers from the Commerce Department's June report are bolstering confidence of a strong third-quarter economic run, after data in other reports also suggest the U.S. economy is steadily picking up momentum. Last week, the Institute for Supply Management's (ISM) released its July manufacturing index that rose to 57.1, the highest level in a year, while the Labor Department showed U.S. employers added another healthy 209,000 jobs last month.
The data track with an earlier, separate report by the Commerce Department that showed the nation's gross domestic output expanded 4 percent in the second quarter as well as another report by the Federal Reserve that indicated manufacturing grew at an annual rate of 6.7 percent from April through June. Businesses propelled the second-quarter GDP expansion by stockpiling inventories in anticipation of greater third-quarter demand.
Continued investment in capital equipment plus a record level of work backlogs are expected to keep U.S. manufacturing plants busy. “The growth in manufacturing activity and capital spending is likely to continue next month, as indicated by a moderate increase in ISM new orders level in July,” Maninder Sibia, economist at Contingent Macro Advisors, said to AP in a report.
June's bookings volume beat the 0.6 percent expansion economists projected. Businesses renewed their appetite for goods after a 1.4 percent orders decline in May, which the Commerce Department reversed from a 0.7 percent growth reading in its previous report, and orders for durable goods have been up in four of the last five months. Machinery orders grew 2.9 percent as a category, led by a 17.2 percent surge for turbines, generators, and power transmission equipment and a 19.8 percent swell in material-handling equipment.
The nation's manufacturing sector continued to hit new record-high volumes in June for shipments, which reached nearly half-trillion dollars, as well as order backlogs ($1.1 trillion ) and inventories ($654 billion). Manufacturers were able to slow down inventory growth to a 0.3 percent rise following a 0.8 percent hike in May, while they resumed raising their level of shipments with a 0.5 percent expansion. Unfilled orders in the sector rose 1 percent after a 0.7 percent increase in May, signaling there is plenty of backlogged work to be done by goods makers.
Bookings rose for all goods categories in June, including a 0.9 percent increase in primary metals and a 1.2 percent rise in fabricated metal products. Computers and electronic products increased 2.9 percent, fueled by a 10.2 percent increase in military spending on communications gear. The 5.5 percent jump in electrical equipment and appliance orders was the largest gain for the category since November 2010.
The closely watched motor-vehicle bookings figure went unchanged in June, following a 1 percent increase the month before. Elsewhere in the volatile transportation equipment sector, the 11 percent and 8.4 percent expansions in respective defense and commercial aviation orders were enough to offset the 28.8 percent drop in bookings for ships and boats to result in a 1.3 percent increase for the category.
The U.S. trade gap shrank more than expected in June on the biggest drop in imports in a year. The 7 percent contraction from May, which was the sharpest narrowing of the gap in eight months, brought the nation's trade imbalance to $41.5 billion, its lowest level since January. While imports fell, exports grew 1 percent to a new record high of nearly $196 billion.
The nation's goods and services deficit decreased by $3.2 billion from $44.7 billion in May, which the Commerce Department downgraded from a previous reading of $44.4 billion. The better-than-projected June shortfall encouraged economists, prompting them to say that trade will not be as big a drag on the U.S. economy as thought earlier and that second-quarter GDP could be even better than the 4 percent expansion the government reported earlier this month. "The improvement in June could mean a modest upward revision to the second-quarter GDP estimate," said Millan Mulraine, deputy chief economist at TD Securities in New York, in a Reuters report. "It also implies a fairly strong hand-off to third-quarter GDP."
The Commerce Department earlier had estimated that trade negatively impacted the nation's April-through-June economic output by 0.61 percentage points. Some analysts predicted that GDP in the period could be upgraded to as high as 4.5 percent, following a 2.1 percent contraction in the first quarter. Economists had predicted a $44.7 billion trade gap in June.
Imports slumped back down to $234.7 billion after reaching a record-high $240.5 billion in April, when the nation's trade gap ballooned to $47 billion. After see-sawing through the first quarter, exports have grown for two straight months, including an increase of more than $2 billion in foreign shipments in May. The sharp June decline in imports, however, fueled concern about U.S. consumer spending, as lower demand for foreign cars and retail goods was blamed.
"The broad-based declines in import activity seem at odds with the narrative of improving domestic demand," Mulraine told Wall Street Journal in its report. Meanwhile, Joel Naroff, chief economist at Naroff Economic Advisors, remarked to Reuters, "With the economy growing, consumer and business spending rising and vehicle sales robust, there is every reason to believe that imports will rebound going forward."
However, the trade data seem in line with the Commerce Department's June retail sales report, in which a 0.3 percent decline in car sales dragged down retail sales growth to a mere 0.2 percent during the month. Retail sales growth of 0.5 percent in May also tracks with the near-record-high $240.3 billion in imports that month. Consumer spending rose 2.4 percent in the second quarter, though that followed an abysmal weather-battered first quarter.
U.S. exports rose in June on gains in all three major categories of capital goods, consumer goods, and industrial supplies. In capital goods, civilian aircraft, medicinal equipment, and agricultural machinery led foreign shipments. Consumer exports were led by medicines and various soft goods.
The domestic energy boom continued to lower the nation's dependence on foreign energy products. In June, the petroleum deficit dropped to its lowest level since May 2009, as imports fell to a 3-1/2-year low, while crude oil exports soared at the same time.
The U.S. trade imbalance with China widened by 4.5 percent in June, on import growth of 3.7 percent to $39.4 billion. Exports to China increased 1.4 percent to $9.4 billion, leaving a trade gap of $30 billion. However, the 4.9 percent year-over-year rise in the gap is modest compared with the 15.2 percent expansion in the gap with the European Union through the first half of this year.
The North American robotics industry had its best six-month stretch of growth ever from January through June, fueled by strong demand from manufacturing companies in all industries.
According to statistics released by the Robotic Industries Association (RIA), a record 14,135 robots, valued at $788 million, were ordered from North American suppliers in the first half of 2014, a 30 percent increase in units and a 16 percent rise in revenue over the same period in 2013. The second quarter was the main driver of the record first half, with 8,197 robots, valued at $450 million, sold to North American customers. This shattered the previous record for a single quarter, exceeding the fourth quarter of 2012 by 31 percent in units and 17 percent in revenue, Ann Arbor, Mich.-based RIA said.
The 5,938 robots, valued at $338 million, ordered by companies in North America from January through March had been the second-best quarter ever, according to RIA statistics, falling just shy of the 6,235 robots sold over the last three months of 2012.
Since 2010 the robotics market in North America has grown an average 26 percent per year. The RIA pointed out that the U.S. unemployment rate has fallen precipitously over this period. Robotics have been at the center of a hot-button debate over whether greater automation has negatively impacted factory employment even as manufacturing has generally been credited for the economy's post-recession revival. Manufacturing added an average 12,000 jobs per month between June 2013 and June 2014, according to the Labor Department.
"While we often hear that robots are job-killers, just the opposite is true," said Jeff Burnstein, president of RIA. "Robots save and create jobs," he added.
Burnstein said that following the recession, the industry has had record years for robot sales while unemployment has steadily fallen toward pre-recessionary levels. RIA said that automation from robots has lifted U.S. factories to become more competitive with the rest of the world, and that has enabled industries to reshore their production, which has created manufacturing jobs.
The automotive industry had the biggest impact on the second quarter’s robot sales performance, with 97 percent more units ordered over the same quarter in 2013. Non-automotive industries, such as semiconductors, life sciences, and food and consumer goods, grew by 22 percent over the first half of 2013, but the strongest growth came in automotive-related industries. Robots ordered from automotive OEM and component industries grew by 36 percent in the first half of 2014.
“While the automotive industry continues to be the largest customer for robotics, it's great to see non-automotive sectors posting strong growth as well,” said Alex Shikany, RIA’s director of market analysis. “This is a very positive sign for the long-term health of the industry.” RIA estimates that some 230,000 robots are now in use at U.S. factories, placing the nation second only to Japan in robot use.