Factory Orders Fall More Than Expected; Recovery Withers on the Vine

The "nascent recovery" was led by manufacturing and now the one bright spot is showing signs of age, just as state payrolls are about to get clobbered.

Please consider Orders to U.S. Factories Declined in May More Than Forecast.

Orders placed with U.S. factories declined in May more than forecast, a sign that manufacturing may be starting to cool.

The 1.4 percent decrease in bookings was the biggest since March 2009 and followed a revised 1 percent gain in April, the Commerce Department said today in Washington. Economists forecast orders would drop 0.5 percent, according to the median projection in a Bloomberg News survey.

Estimates of total orders in the Bloomberg survey of 70 economists ranged from a decline of 2 percent to a gain of 1.5 percent. The decrease in May was the first in nine months.

Manufacturing in June expanded at the slowest pace this year as factories received fewer orders and demand from abroad slowed, a report showed yesterday. The Institute for Supply Management’s manufacturing gauge fell to 56.2 from 59.7 a month earlier. Readings greater than 50 indicate expansion. The Tempe, Arizona- based group’s new orders measure fell to the lowest level since October.

Demand for durable goods, which make up just over half of total factory demand, decreased 0.6 percent in May. Shipments of durable goods fell 0.3 percent.

Bookings of non-durable goods, including food, petroleum and chemicals, decreased 2.1 percent. The decline reflected a drop in the value of orders for petroleum products, clothing, fertilizers and beverages.

Orders for capital goods excluding aircraft and military equipment, a measure of future business investment, increased 3.9 percent after a 2.8 percent drop in April. Shipments of these goods, used in calculating gross domestic product, rose 1.4 percent after rising 0.4 percent.

Factory inventories declined 0.4 percent in May, and manufacturers had enough goods on hand to last 1.25 months at the current sales pace.

Recovery Withers on the Vine

You should not have to be a genius to figure out the rebound in manufacturing was a result of four factors now withering on the vine.

• Inventory replenishment
• Unsustainable stimulus
• Housing incentives pushing demand forward on appliances
• Rebound in auto sales from extremely depressed levels

Is Europe going to lead the world recovery? China? US Consumers?

The answers are No, No, and No

Manufacturing was the one bright spot but its best days are now long gone. Moreover China Manufacturing Slows for Second Month; US ISM Weaker than Expected; Weekly Unemployment Claims Stubbornly High; Existing Home Sales Plunge

I am almost amazed at the number of talking heads still yapping about and believing in the "recovery". Let’s recap some points from How Policy Errors Cause Depressions (and how "in isolation" some things Krugman says make sense).

European Policy Errors

In Europe, the ECB made similar policy errors in attempting to bail out French and German banks in deep slop over poor loans to PIIGS, primarily Greece, Portugal, and Spain.

The correct policy decision in Europe (assuming the foolish loans were already made) was to restructure the bad debts at a pace that could actually be paid back. Instead the ECB insists that Greece, Spain, and Portugal pay back those loans in full, something that I guarantee you will not happen.

Here is a simple point-by-point analysis that shows how that policy error will effect on the entire global economy.

How Policy Errors Cascade

• As long as the ECB’s "extend and pretend" policy is in play, Greece, Spain, and Portugal will remain wrecked while burdened by loans they will eventually default on anyway.
• In that timeframe, European growth will be anemic at best. Indeed, it is far more likely that Europe will slide back into a deep recession than simply sputter along.
• As long as European growth is weak, China will be weak because Europe is China’s largest trading partner.
• If China’s exports decline, China will need fewer imports from Australia and Canada.
• If China and Europe are weak, there will not be tremendous demand for US exports.
• Global job growth will remain weak.
• Fiscal stimulus measures will fail.
• Earnings estimates will surprise to the downside and the global equity markets will be extremely vulnerable to further losses.
• Further equity losses in conjunction with absurd pension benefit assumptions will bankrupt many city, state, and municipal pension funds.

 This is the insanity of "extend and pretend" measures not only in Europe but in the US as well.

Extend and Pretend Policy Errors Everywhere

The lesson of Japan (not just something economists have forgotten but rather something economists never learned in the first place), is that you cannot spend one’s way to a recovery. Demand can be pushed only so far forward before it collapses, just as it has now.

You cannot pave roads to prosperity, nor can you start a recovery by stimulating housing when there is too much housing inventory already. Public payrolls are overly bloated, an actual drag on overall employment and the economy, yet the administration is foolishly attempting to preserve public sector jobs.

Budgetary Murder

This depression (and we are in one, masked only by safety nets galore), is The Price We Pay For Budgetary Murder.

Unfortunately, the budgetary murder continues unabated, and that will prolong this depression.

Japan is in its mess because of Keynesian and Monetarist stimulus, we are in this mess because of Keynesian and Monetarist stimulus, and the UK is in its mess because of Keynesian and Monetarist stimulus. Yet the Keynesian clowns want more Keynesian stimulus and the Monetarist clowns want more Quantitative Easing. 

No policy ever performs badly enough to cause its disciples to abandon it.

Mike "Mish" Shedlock