Nothing Is As It Seems: Factory Orders and Unemployment

By Jeff Harding.

Everyone is pleased with the employment numbers that just came out today. Also, industrial production showed an increase. These numbers would indicate that we are well on our way to recovery, and I hope that is true. Many economists have hailed these reports as a clear sign that we are well on the way to recovery. I heard Brian Wesbury of First Trust Advisors on the radio this morning say that we are clearly in a “V”-shaped recovery.

Here is a typical reaction:

This is one of those game-changer reports that should fundamentally alter the perception regarding the economy. We have been steadfast in our belief that the labor market is stabilizing and that payrolls would turn positive around the turn of the year. It is safe to say that many if not most economists have been skeptical that the labor market would perk up, and the jump in the unemployment rate in October seemed to reinforce the negativity around the labor market. Today’s number was a little more and a little faster than we had expected, but it largely jibes with our broad evaluation of the employment picture. However, it should spark a much more significant re-assessment of the economic situation among market participants and the consensus at the Fed. –Stephen Stanley, RBS

But are these indicators correct? Do they signal a turnaround? Since I am accused of always seeing things darkly, I don’t wish to be overly critical, but I don’t think they are sending signals of a true recovery. Let’s examine the reports.

Factory Orders:

Factory orders are a bellwether of future economic activity. Durable goods orders, those goods meant to last more than three years, actually declined 0.6%. Non-durable order went up 1.6%. But,

Bookings for capital goods excluding aircraft and military equipment, a measure of future business investment, decreased 3.4 percent, a bigger decline than the government estimated last week. Shipments of those goods, used to calculate gross domestic product, fell 0.3 percent, also a bigger drop that initially reported.

The media for the most part are reporting that factory orders went up 0.6% during October.

Why is this important?

Generally an increase in durable goods orders indicates what is called an increase in “higher” order production, or things like factory machinery that will make things for those producing non-durable goods, or “lower order” production such as for equipment that will make consumer goods.

Generally in a “real” economic recovery, i.e., one in which there is real economic growth, people cut back on spending, increase savings, which lowers interest rate. The economic signal sent by lower interest rates means that it is not economically worthwhile to produce consumer goods now since people aren’t buying consumer goods. But since lower interest rates are attractive to some manufacturers, and since it takes a long time to make durable goods, it is a good time to make durables because by the time they are completed, consumers will be ready to buy and consumer goods manufacturers will need those machines.

It’s clear that durable goods manufacturers aren’t getting that signal. So, durable goods orders have declined while non-durables have increased. But, while non-durable numbers have increased, does it mean consumer goods manufacturers are increasing production in response to demand? Well, somewhat, since inventories in factories and stores is low. After all, people are still buying things, just not as much as before.

But it is clear that much of the increase in non-durables was due to higher costs. Non-durables such as oil and food have gone up in price sine the last report, so I would take these manufacturing numbers with a grain of salt.

This is textbook Austrian school economics of what happens when you apply Keynesian stimulus.

Unemployment:

It sounds good that unemployment levels are leveling off. Nonfarm payrolls fell by just 11,000 last month, way down from the 111,000 jobs lost in the prior month. The measure of unemployment used by the Department of Labor dropped to 10% from 10.2%.

But where are these jobs coming from?

Well, not from the industries we want to see grow. Construction employment declined by 27,000, manufacturing employment fell by 41,000, and information industry jobs fell by 17,000. These are real economic jobs governed for the most part by market forces.

Employment in professional and business services rose by 86,000 in November.Temporary help services accounted for the majority of the increase, adding 52,000 jobs. Since July, temporary help services employment has risen by117,000. Great more consultants, temps, and lawyers needed to keep up with regulation.

We are also seeing huge growth in the health care and health services categories: 35,000. The health care industry has added 613,000 jobs since the recession began in December 2007. This is significant because much of this industry is directed by government through transfer payments. That is, much of this industry is supported by taxes rather than market forces. Not good. And, based on health care legislation, you will see even more growth in the health care industry in the future.

If you ask me, these numbers aren’t that rosy. Unemployment seems to be improving, and I would guess it is, but not in the way that would bring real economic growth. Factory orders are mostly related to stimulus, not real market forces. These are signals that something is rotten underneath, and once the stimulus wears off, these numbers will regress.