Everyone points to manufacturing as the weak link in our economic recovery. A rebound in manufacturers' orders for durable and nondurable goods would help spur production and employment. The chart below depicts the trend in new orders, production and employment over the past 5+ years. In order to remove outliers in the data, we smoothed the data by using a three-month moving average of each of the series. Then we created an index by using the January 1997 level as the base in order to compare these three indicators on the same chart.

In terms of total manufacturing, new orders and production peaked at roughly the same time - mid-year 2000. They also bottomed out at about the same time - January 2002. During the entire period, industrial production grew faster than orders. This is not unusual since even in the worst of times, manufacturers have backlogs of unfilled orders to produce.

Notice that the trend in manufacturing employment is somewhat at odds with the trends exhibited in new orders and production. Manufacturing employment increased through May 1998 and then started heading down, slowly. The downward trend in manufacturing employment coupled with the rise in production suggests that productivity was increasing during this period. The large drop in manufacturing employment took place about six months after the peak in orders and production, reflecting employment as a lagging indicator. The latest figures available for July suggest that new orders have bottomed out and are beginning to head higher. Production has stalled in the meantime, but a recovery in new orders may help boost production to new levels.

Key components of durable goods
While nondurable goods orders tend to decline during any economic downturn, the declines are often more muted than for durable goods since nondurable goods are less sensitive to the business cycle. Nondurable goods include staples such as food and clothing, but durable goods include furniture, appliances and automobiles, purchases that can often be postponed. The charts below compare new orders, production and employment for the various key sectors of the durable goods market.

Primary metals exhibited ups and downs even before the start of the most recent recession in March 2001. New orders peaked in late 1997 while production peaked in mid-1998. The sector has headed down over the past several years, but there are signs that perhaps the trough was reached in June or July this year. The employment trend is equally discouraging, although it appears that declines are not much larger than for orders or production. This suggests that productivity gains may not have been very strong in this particular durable goods sector over the past five years.

Fabricated metals showed a rising trend through mid-2000 when both new orders and production peaked. Since new orders rose faster than production during the entire period, it reflects the fact that unfilled orders were rising at a slower rate, and then falling at a faster rate during this period. Employment peaked in early 2001 and has tumbled rapidly ever since. The sharper deterioration in employment than in orders or production suggests that productivity was on the rise in this industry.

Machinery new orders peaked in mid-2000, but production peaked about six months later. Unfilled orders and new orders rose at about the same pace through the end of 2001, but then unfilled orders took a dive. This may suggest why the pace of production in 2002 and early 2003 was slower than for new orders. Both production and new orders appear to have bottomed out and are poised for recovery. The same can't be said for employment in this sector. Employment peaked in early 1998 and has headed steadily lower, dropping more dramatically since 2001. This reflects not only the weakness in new orders in this sector, but also improved productivity.

Computers & electronic products are showing quite a different trend from the other durable goods sectors. Production growth was robust throughout this 5+ year period with only a slight dip in 2001. Production was so much stronger than new orders and employment that it is indexed on the right hand side where it shows that computer & electronic product production has nearly tripled since January 1997. At the same time, new orders peaked in 2000 and bottomed out in early 2002. The upward trend in new orders in the near term is moderate, but performing better than the other key durable goods sectors.

Employment trends, however, are not any different in this sector than they are for other manufacturing sectors. Employment peaked in early 2001 and has header lower ever since. Given the robust production gains over this period, there is no question that great strides were made in productivity.

Electrical equipment, appliances & components have not yet shown a trough in either production or new orders. This sector peaked a bit later than the others - closer to 2001 than 2000. Here is another area that shows great improvement in productivity given that the declines in employment are significantly sharper than the declines in production.

Transportation trends are different for motor vehicles & parts and aerospace products. Total new orders have fluctuated in a relatively narrow band. However, the production of motor vehicles & parts showed an almost perfect countercyclical relationship with aerospace products. Since 2002, motor vehicle production has shown healthy gains while aerospace has declined sharply. Despite the fact that new orders and production have remained more positive than not, there is no question that employment in this sector declined over the past three years. The decline is somewhat more muted than for other durable goods sectors suggesting that productivity gains are less pronounced. Keep in mind that the majority of autoworkers are unionized and productivity gains are limited in this environment.

Furniture & related products are exhibiting a cyclical pattern despite the fact that housing activity has grown unabated during this entire period. There is no question, though, that the declines in this sector are moderate relative to the other durable goods sectors. Employment dropped from its highs but is not very different from levels seen five years ago. In most of the other cases, except transportation and fabricated metals, employment is down 20 to 25 percent below 1997 levels.

BOTTOM LINE
What has this exercise shown us? Not surprisingly, it shows that employment declines in manufacturing have surpassed declines in new orders and production. The difference between production and employment implies productivity growth. In most cases, productivity growth has been pretty good in these durable goods sectors. Overall productivity growth is good for the economy and corporate profit margins, but discouraging for workers formerly employed in these sectors. These workers are not likely to recover their jobs even when a recovery takes hold.

We often look at the broad picture in the economy and make generalizations - "manufacturing activity is in a funk". Actually, some industries have not weakened as much as others and some have shown healthy growth. All of the above sectors appear to have reached bottom and are poised for recovery. The magnitude of that recovery is certainly questionable. If the foreign exchange value of the dollar remains depressed, the manufacturing recovery may be better than expected.

Evelina M. Tainer, Chief Economist, Econoday