This morning’s data from the Census Bureau on new orders for durable goods provides a great illustration both of why it’s vital to be careful reading and interpreting statistics, and why it’s so unavoidably difficult to measure and interpret economic trends.
This monthly data – today’s preliminary report for July will be revised on September 3 (and then several times more over the next few years) – is viewed as a key gauge of domestic manufacturing’s health, but the headline monthly change figure includes sectors that most specialists believe distorts the picture: defense-related goods and aircraft.
Their importance was spotlighted again in this morning’s report. New orders for defense-related manufactures fell by 15.3 percent on a monthly basis – after rising by 4.1 percent in June and dropping by 24.0 percent in May. In other words, these data are really volatile. Moreover, they’re heavily affected by political decisions – the size and growth of the defense budget. As a result, it’s understandable why defense-related orders aren’t seen as genuinely representative of domestic industry’s chops or prospects.
The distortion looks way more extreme for civilian aircraft in particular. Orders for airliners skyrocketed by 318.0 percent in July month-to-month according to the advance figures – after increasing by 11.1 percent in June and decreasing by 2.9 percent in May. It’s obvious, then, that these data are awfully volatile, too. Further, as predicted in The Wall Street Journal yesterday, these incredible aerospace numbers resulted from one great month for a single company – Boeing.
Largely as a result, total new orders for durable goods jumped by a record 22.6 percent in July on month – after growing by only 2.7 percent in June and actually shrinking by 0.9 percent in May. Meanwhile, the results for durable goods orders stripping out aircraft and defense goods – the ”core capital expenditures” number widely considered to be the very best indicator of manufacturing’s health – fell by 0.5 percent in July, after improving by 5.4 percent in June and dropping by 1.4 percent in May.
Here’s the (big) complication, though. Although orders for civilian aircraft can indeed fluctuate wildly from month to month, aerospace isn’t exactly a cottage industry. The Federal Reserve’s industrial production index makes this clear – even though unlike the durable goods numbers, it adjusts for inflation.
According to the Fed, in July, manufacturing represented just under 71 percent of the nation’s total industrial output. (The production of mines and utilities makes up the rest.) That’s down from 76.6 percent ten years ago. Last month, the aerospace industry (which includes missiles as well as aircraft parts, both for military and non-military plans) made up 4.6 percent of the industrial production index. But since July, 2004, this percentage has grown from a little less than 3.2 percent.
So however volatile, aerospace is becoming a greater and greater part of the total American manufacturing scene. And every month this trend continues, removing it from the core capital goods data becomes a little less justified.