December 2011 Manufacturers’ Shipments, Inventories and New Orders

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According to the U.S. Census Bureau, the value of shipments, inventories and new orders were mixed in December for the sectors and industries we track.
 

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Shipments increased for a seventh consecutive month, by $3.4 billion (0.7 percent) to $459.4 billion. Durable goods shipments increased $4.4 billion (2.2 percent) to $207.5 billion, led by primary metals. Shipments of nondurable goods decreased $1.0 billion (0.4 percent) to $251.9 billion, driven lower by petroleum and coal products. Wood shipments fell by 1.5 percent while Paper rose by 0.3 percent.
 

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Data from the Association of American Railroads (AAR) and the Ceridian-UCLA Pulse of Commerce Index (PCI) help round out the picture on goods shipments. AAR reported a 23.2 percent decrease in not-seasonally adjusted rail shipments in December (relative to November), and a 7.3 percent rise from a year earlier. Seasonal adjustments converted the 23.2 percent November-to-December decrease to a 1.8 percent gain, however. Rail shipments of all forest-related products were higher in December 2011 than a year earlier.

The PCI, which tracks diesel use for over-the-highway trucking, rose 0.2 percent on a seasonally and workday adjusted basis in December after a 0.1 percent increase in November. “Many Wall Street economists have jacked up their ‘backcasts’ for fourth quarter GDP growth to 3 percent but the PCI does not support this view,” said Ed Leamer, PCI chief economist, prior to the GDP release. “The PCI measures inventories destined for factories, stores and homes, and the decline in the PCI in the third quarter correctly anticipated the large negative contribution of inventories to GDP growth.” With all three months of the fourth quarter now available, the PCI suggested 4Q GDP growth of 2.0 percent or less. As indicated in our GDP blog post, however, the Bureau of Economic Analysis (BEA) estimated 4Q2011 real GDP growth at 2.8 percent -- quite close to the 3 percent figure Leamer mentioned. We expect the BEA’s estimate to be revised lower during upcoming months.

“With real retail sales growing more rapidly than the PCI over the last two quarters, however, the first half of 2012 may be an inventory-rebuilding period, allowing inventories to make a substantial contribution to GDP growth,” Leamer concluded.
 

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Inventories, up 26 of the last 27 months, increased $0.4 billion (0.1 percent) to $610.1 billion -- the highest level since the series was first published on a NAICS basis in 1992. The inventories-to-shipments (IS) ratio was 1.33, down from 1.34 in November. Durable goods inventories increased $1.1 billion (0.3 percent) to $370.0 billion, led by transportation equipment. Inventories of nondurable goods decreased $0.7 billion (0.3 percent), dragged lower by chemical products.

Forest products inventories shrank: Wood by 0.2 percent and 0.8 percent for Paper.
 

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We had expected either the durable-goods IS ratio to fall or GDP growth to falter. There had been an apparent disconnect between those two metrics since 1Q2011. The graph above shows a negative correlation between quarterly GDP change and the durable-goods IS ratio (i.e., quarterly GDP change climbs when the value of shipments comes closer to matching that of inventories, causing the IS ratio to fall, and GDP change drops when the value of shipments exceeds that of inventories, causing the IS ratio to rise). Note that the IS ratio is inverted in the above figure to demonstrate that the rebound in GDP growth since 2009 has not been supported by shipments of durable goods to the same degree as before the recession.

It is somewhat unusual for GDP change to run counter to its historical relationship with the IS ratio for consecutive quarters (2Q and 3Q2011), thus we had been awaiting a correction: either for the IS ratio to fall or GDP growth to decline. With the IS ratio falling in December, it appears the two metrics may again be tending toward moving somewhat in tandem.
 

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New orders, up two consecutive months, increased $5.3 billion (1.1 percent) to $466.2 billion. This followed a 2.2 percent November increase. Excluding transportation, new orders increased 0.6 percent. Durable goods orders increased $6.3 billion (3.0 percent) to $214.3 billion, led by transportation equipment. New orders for nondurable goods decreased $1.0 billion (0.4 percent) to $251.9 billion.