Is Manufacturing Cooling Down?

Jason Stipp: I'm Jason Stipp for Morningstar. June durable goods orders were out on Wednesday and it showed an unexpected drop of 1%. This stoked some concerns about some weakness in the manufacturing sector, which had been one of the growth drivers of the recovery. Here with me to interpret the numbers and give us his take on what he is seeing in manufacturing is Morningstar's Bob Johnson, Associate Director of Economic Analysis. Bob, thanks for joining me.

Bob Johnson: Good to be here.

Stipp: So the headline number was the June durable goods down 1%, but there was some interesting numbers underneath of that. What were you seeing in some of the underlying numbers and what was up and what was down?

Johnson: Sure. I think not every category was in one direction, and I think that was the key thing to really take out of the numbers. And really big driver of the overall number is that civilian aircraft, in other words, Boeing orders were very poor this quarter, and they were down 25%. I mean that's a huge monthly number that really jumps everything around. So that was the biggest factor in the overall number.

Stipp: And what might be behind that particular jump? Why is that so volatile?

Johnson: Yes. One thing that happened, we've got a big air show that comes up every year in July and August, and that air show tends to draw a lot of new orders for aircrafts. So the month's kind of leading up to that or a little bit slower in terms of aircraft orders.

Stipp: Maybe they're holding them back to announce it at this big event.

Johnson: Absolutely. We saw a few of those orders over the past couple of days.

Stipp: Okay. What did you see and what was up, what was positive in the report?

Johnson: Yeah. There were a number of categories that looked pretty good. Computers looked good; communications equipment look good; automotive looked good. So there were a lot of categories that were -- fabricated metals was another one. But on the other hand, we had some other categories that weren't as good. Machinery was down a little bit, not a lot. I mentioned the aircraft already, which was a huge negative, and some of the raw material metals, your basic steel, aluminum type of things, were also off. So those were the key things that were off.

Stipp: Okay. And how does the information in this report jive with other indicators that you are looking at? Is there sort of agreement on the trends that you are seeing here cooling off, or are some things out of place and out of whack with what else you're looking at?

Johnson: Yeah. Well, I think that it's very consistent, and by the way, the way I probably back off and look at these numbers, is look at the orders overall and we'll take the aircraft out of it, we'll take the defense spending budget out of it, and kind of look at those numbers. And that number was actually up for the month as it was in the prior month. So we've got a pretty good trend in shipment of those items. So I was pleased to see that.

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Stipp: Okay.

Johnson: That's the most positive part of the report actually.

Stipp: So when you're looking at this report and some of the other things that you're seeing in manufacturing, it does look like there has been a bit of a plateau from really strong growth that we had seen earlier. Are you worried about this? Is this a concern and something that we should really be closely watching in the manufacturing sector? Because if it does cool off, you know I think that that could potentially have some indications, pessimism for the rest of the recovery, right?

Johnson: Yeah. I think that what happens every time coming out of recovery, you have a real spike in the manufacturing economy where it recovers, recovers fast and recovers sharply, and then it backs off a little bit after an initial run. We saw that with the ISM, Institute for Supply Management data, that number went all the way up to 60. Now, it's kind of backed off to 55, still a growth number, but not as good as it was. This measure I talked about, this capital goods spending ex-aircraft was up 20% year-over-year. Now, it's only up 17% or 18% year-over-year. So not as high as it was, still a very good number.

And by the way, I looked at past recoveries, and almost always we spike to this 20% year-over-year improvement, and then we usually dip back to 10% year-over-year growth. So, frankly, that numbers can stabilize a little bit more in here and still be kind of a normal trend.

Stipp: Sure. Certainly, it would be difficult to sustain some of those fantastic growth rates that you're seeing in the heat of the recovery.

Johnson: Absolutely. I think that's where we've got a slow comeback here, and you can see it. The orders were so strong, they couldn't ship them. In fact, we've had three months in a row where, ex-the airplane part again, the unfilled orders went up each and every month. So if we can't fill those orders, why place another one, so to speak. So I think that's a little bit behind the numbers too. They built their backlogs and now they are going to ship against those for many, many months.

Stipp: Sure. Bob, last question for you. GDP report out on Friday. What are your expectations, given some of the data that you have seen recently, what are you looking for on Friday?

Johnson: Yeah. I think that range I am looking for is 2% to 3% and the inventories and exports are the big swing factor. I hate to give you that bigger range. I am a little more hopeful on the 3% range, but I'll acknowledge that most people think it's going to be more like 2%. This report looks pretty good for it. We built the inventory just a little bit, so that will take that away as being a big detractor. We were all worried the inventory number might actually turn out to be a negative this quarter. I think consumer is going to be a little better, up over 2% again this quarter, which may surprise a few folks. The business investment, the capital growth that we have seen in this report today looks likes that may be a net contributor for the quarter as well. Unfortunately, exports are going to hurt us a little bit.

Stipp: All right. Bob, well, I know you'll be following up with a more thorough report on GDP after it comes out on Friday, but thanks so much for joining us today.

Johnson: Thank you.

Stipp: For Morningstar I am Jason Stipp. Thanks for watching.