(What’s Left of) Our Economy: The Most Reliable Manufacturing Gauges Keep Disappointing

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automotive, business spending, core capex, durable goods, manufacturing, {What's Left of) Our Economy

What a stinker this morning’s report on durable goods orders was!

The Census Bureau’s new advance look at demand for these products in September showed a 1.7 percent monthly decline in orders for capital equipment outside the defense sector and excluding the big (but highly volatile) aircraft industry. That was the second month-to-month drop in this widely followed gauge of business investment in the last three months. As a result, “core capex” (capital spending) is now up five percent year-on-year.

Interestingly, the month-to-month figures are presented in the press releases on a seasonally adjusted basis, but the year-on-year figures are not seasonally adjusted. To add to this mystery, you can get the seasonally adjusted year-on-year numbers from the Bureau’s interactive data base, but it’s one-month behind.

Looking at these seasonally adjusted year-on-year data from April on (to factor out the weather-depressed activity from winter and the equally distorted early spring catchup) shows that it’s up from 4.02 percent to a whopping 7.31 percent – which sounds great. But if you look at the 2013 data, you see that last year was a weak one for this business spending, so the annual comparisons are bound to look impressive. Barring a huge upward revision in the final Census report for September (due out November 4), the latest year-on-year growth won’t be nearly as good.

Drilling down into the details (and these figures include aircraft and defense spending), the new report reveals that new orders strengthened from August to September in four of seven major industry groups tracked (meaning either that they moved from contraction to growth, their growth sped up, or their contraction slowed down). These sectors were primary metals, fabricated metal products, transportation equipment, and miscellaneous durable goods). New orders weakened in machinery, computers and electronics products, and electrical equipment, appliances, and components.

New orders actually fell month-to-month in three of these seven sectors: machinery, computer and electronics products, and transportation equipment.

Also of note: New orders in the (heretofore) scorching hot automotive sector fell on month in September for the second straight month. Year on year, such spending is up only 4.7 percent – less than in an overall manufacturing sector its growth has been leading.

But because little is straightforward in American manufacturing data, at least in the short term, just after this lousy durable goods report came out, the Richmond, Va. branch of the Federal Reserve told us that manufacturing activity in its district continued on its recent tear. The October headline figure – which measures overall manufacturing activity – surged to 20 from 14 in September. All the key internals, like new orders and employment, looked strong, too.

Keep in mind, though, that like all of the monthly regional Fed manufacturing surveys, this Richmond report is vulnerable to “survivorship bias.” It measures how the region’s existing manufacturers say they’re faring, regardless of whether their numbers have grown or shrunk over any given time frame. And the same goes for the upcoming purchasing managers’ indexes from the Institute for Supply Management and Markit.

Making News: The Conventional Wisdom on Business Investment Looks Flat Wrong

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business spending, casino capitalism, financial deregulation, Making News, productive investment

“Everyone knows” that, starting in the late-1970s, waves of financial de-regulation destroyed most of American business’ incentives to invest their earnings productively, and instead hooked them on wasteful financial gimmickry, right?

My new article for Marketwatch.com, posted this morning, makes clear that in this case, what “everyone knows” is flat wrong — at least according to the most authoritative statistics. Click here to read all the surprising details – and their huge policy implications.

(What’s Left of) Our Economy: Right and Wrong Ways to Think About the Quality of Growth

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an economy built to last, business spending, growth, Hilsenrath, innovation, intellectual property products, Mainstream Media, manufacturing, Obama, process innovation, R&D, Wall Street Journal, {What's Left of) Our Economy

Today’s revisions to the second quarter’s figures on gross domestic product (GDP) growth conveniently provide an opportunity to comment both on the vital issue of the quality of that growth, and on a related subject raised by one of the most boneheaded points raised recently by a Mainstream Media Journalist (a high bar as most of you recognize).

The quality of growth matters decisively for the U.S. economy because a prime lesson Americans should have learned once the financial crisis struck (but in too many cases didn’t) is that the wrong kind of growth (e.g., fueled by mutually reinforcing credit and housing bubbles) eventually tends to crash and burn. That’s why President Obama deserves lots of credit for speaking about the need to create a U.S. economy that’s “built to last.”

As per previous posts, however, it’s hard to spot much progress being made by the U.S. economy toward this vital objective, and the new GDP numbers leave that problem essentially unchanged. Once more, let’s look at the share of the economy taken up by personal consumption and housing together – the toxic combination that inflated most of the bubble.

The new figures show that these two sectors made up 71.30 percent of gross domestic product after inflation. That’s a smidgeon better than the 71.34 percent recorded in the advance estimate of GDP, which was released last month. (A third and “final” – for a while, anyway – estimate will come out next month.) But it’s higher than the 70.94 percent level in the second quarter of 2009. In other words, the recovery has rendered the economy even more consumption- and housing-heavy.

Even more troubling, the economy is more consumption- and housing-heavy than when the last recession began at the end of 2007. Then, those two sectors comprised 71.16 percent of real GDP, and according to the President, the economy at that point was definitely not built to last. The trend only looks good when the latest data are compared with those at the height of the previous decade’s bubble – the 73.24 percent of inflation-adjusted GDP taken up by housing and consumption in the third quarter of 2005. And this improvement looks all the less impressive given that now everyone with a lick of sense now understands that the economy was on an insanely reckless course at that time.

Wall Street Journal chief economics correspondent Jon Hilsenrath showed in a post Tuesday that he’s thinking about the quality of growth, too, which is encouraging. If only his thinking weren’t so inanely ignorant. Hilsenrath bemoaned how little growth since the end of the recession has been fueled by “ideas” – meaning what the Commerce Department calls “intellectual property products.” These products consist of “Expenditures for research and development (R&D) and for entertainment, literary, and artistic originals.”

What has upset Hilsenrath so is that business investment on intellectual property products has risen only by 17.18 percent in real terms during the recovery, whereas investment on business equipment has surged by 58.30 percent. His interpretation? “American firms have been investing much more aggressively in stuff than in ideas in this upturn,” and he concludes that “An ideas-driven recovery would be…more encouraging.”

The author doesn’t explain his reasoning, but it looks like he views creating a movie as being more valuable than producing a machine tool. And here’s why such (widespread) views are so utterly goofy – at best: It’s not because machine tools etc are in fact necessarily more valuable than movies. It’s because machine tools – and other types of business equipment and manufactured goods more generally – necessarily incorporate lots of intellectual property (i.e., “ideas”). And these ideas come both on a product side and on a process side. Unless Hilsenrath thinks that these devices, along with aircraft and semiconductors etc, result from mindless brutes wielding hammers and bellows and working from blueprints that come from – actually, where does Hilsenrath think the blueprints come from?

The flip side of course is true, too. The creation of many intellectual property products often requires lots of what Hilsenrath dismisses as “stuff.” In fact, the author would know this had he read one of the Commerce Department’s announcements of the decision to track intellectual property spending in its GDP data. The first example of such investment is the development of “a new cancer drug.” In other words, a manufactured good. Which was conceived with the help of major investments in laboratory equipment.

Of course, maybe Hilsenrath isn’t entirely to blame for drawing such sharp distinctions. At the least, the government’s very decision to break out intellectual property spending from other types of business spending strongly encourages this practice. At the same time, the observations in this post aren’t exactly rocket science. But they do spring from something that’s vital to economic (and analytical) success even though it’s not tracked (yet) by the Commerce Department – common sense.