by Mary Hanbury

Orders for long-lasting factory goods dropped in February, indicating that the manufacturing industry is facing significant pressure.

The headline figure dropped 2.8 percent, driven by a substantial drop in aircraft sales. Core capital goods– a proxy for business investment – also dropped by 1.8 percent.

Though the decline was consistent with the median forecast of a 0.3% decline among 74 economists on Bloomberg yesterday, such weak results across the board were unexpected.

“Today’s report throws cold water on the notion of a strong manufacturing rebound that some were hoping for,” said Jason Schenker, chief economist at Prestige Economics.

U.S. manufacturing companies are still coping with the effects of plunging crude oil prices, which has trimmed the capital spending of oil giants.

The strength of the U.S. dollar combined with a fear of rising interest rates, an unstable equity market, and overall economic uncertainty has also contributed to decreases in capital expenditure.

Gross private domestic investment has been soft since September and orders for durable goods have generally been in decline, signalling that last month’s 4.2 percent increase was most likely an anomaly.

Last month’s 4.9 percent increase was driven by a spike in aircraft sales, specifically from Boeing, the largest commercial aircraft manufacturer. Aircraft orders are notoriously volatile; this month, the company reported a 97 percent decline in orders.

Motor and computer bookings were the only sectors to see a rise, indicative of solid consumer spending, and consistent with the January report.

Other indicators related to manufacturing have shown signs of weakness.

The Purchasing Managers Index, part of the ISM Manufacturing Report, and which measures production level, new orders and employment levels, was below 50 percent in February, indicating that an equal number of respondents reported ‘better’ and ‘worse conditions’. The number has stayed below 50 for five consecutive months, a sign that the industry is contracting.

The Industrial production index, a monthly report showing the volume of raw goods produced by industrial firms, has also been negative year on year for four consecutive months.

“U.S. manufacturing is clearly in recession. The last time we had results this sort, when we were not in, or approaching a recession, was 1952,” said Schenker.

Idaho-based farm machinery company, Pioneer, said they have experienced sluggish sales since the end of 2014.

“We are being as creative as we can; we’ve reduced the price on equipment and are doing more advertising,” said sales manager Chris Cornforth.

Low commodity prices, high machinery costs and growing uncertainty in the economy are to blame for flagging demand in farm machinery equipment. Pioneer has been forced to reduce their tractor and combine inventory because of this.

A few signs suggest some improvement in coming months. Regional manufacturing reports released over the course of last week showed an uptick in activity.

“Some of the regional metrics that have come out this month have seen outstanding sequential swings in new orders; some of these are largely unprecedented,” said Jacob Oubina, Senior Economist at RBC Capital Markets.

Commercial and industrial lending activity also remains positive, which suggests companies may start to invest further down the line.

There have been encouraging statistics in the labor market with manufacturing job openings at a 6-month high. This is expected to improve further when demand and production rates accelerate.

However, the decrease in new orders in February will affect next month’s report and an overall 0.3 percentage decrease in shipments will likely impact Q1 GDP negatively.

Untitled 3“It’s not time to push the alarm button just yet, but it is troubling,” said Hugh Johnson, Chairman of Hugh Johnson Advisers.