Despite the modest drop, both are tracking ahead of the same period last year.
By Manuel Gutierrez, Consulting Economist to NKBA
Shipments fell 2% to $502 billion in February, although they are still 2% higher than the same month last year, while new orders also dropped, but by a smaller 0.8% to $506 billion. They are also tracking above February of last year, by 1.8% higher.
Monthly data on orders and shipments are the standard measurements for the health of the manufacturing sector. Orders reflect the demand for manufacturing products and indicate to what extent factories will be able to continue to operate efficiently.
Shipments, on the other hand, indicate how well manufacturers can fill those orders from their current production and inventory
stock.
February is the latest month for which manufacturing data is available.
However, new orders and shipments do not tell the full story. There is a vast amount of economic activity captured in the production process itself, and although there is no actual data on production activity, there is a series of indexes calculated by the Federal Reserve Bank as proxies for production.
New orders topped $500 billion for February, tracking nearly 2% ahead of last year’s pre-pandemic levels.
Figure 1 displays the industrial production index back to its inception, around 100 years ago, for the two major industrial sectors: Manufacturing and Mining.
In the chart, both indexes are recalculated as a percentage change from the initial year, 1920. Any point on either chart is read as the percent change from that year. For instance, the final point for Manufacturing is just under 2,000%, which means that production today is nearly 200 times its 1920 level.
It’s clear from Figure 1 that Manufacturing production has increased many times faster than Mining. Production for that discipline is about 40 times higher than in 1920. This is understandable, since mining production is limited to finding materials and extracting them from the Earth.
Manufacturing, on the other hand, is limitless in the sense that businesses can continuously develop new products to meet consumer demand, as well as expand the existing range of products.
For illustration purposes, Figure 2 displays the two major product categories of the manufacturing sector — Durables and Nondurables —going back to 1972.
Production of durable goods, such as vehicles and household appliances, has increased multiple times over the last 50 years. This reflects the increased number and value of products added over the year, such as computers, mobile phones or flat-screen TVs.
Flat-screen TVs were initially developed in the 1960s, but it was not until 2000 when the first consumer models came to market — at very high prices. A few years later, however, as competition heated up, prices began to come down and production ramped up. In other words, durable goods can come into existence at any time.
At the same time, production of nondurable goods has stagnated at around the same levels it stood 30 years ago. One of the reasons is that there are physical or preferential limits as to how many of those products consumers need or acquire. For instance, the nondurables category includes products such as food and clothing.
Looking further into individual product categories, Figure 3 shows the long-term trend of a range of products divided into the two categories of durables and nondurables. Note that, for ease of interpretation, different scales are used. Comparisons between the two charts must be made with that in mind.
Production of only one durable category, NonMetallic Minerals, shown by the dark green line in the top panel, is lower today than what it was in 1972. In fact, through virtually the entire production period, it is below the zero line, indicating that it is lower than its initial value.
NonMetallic Minerals includes products like sand or limestone, which have a limited range of uses and for which there are man-made substitutes, such as plastics.
In contrast, there are several product categories within Nondurable Goods with declining production levels. Most of them are the result of imported products being substituted for those manufactured at home. Textiles is one of the most visible examples.
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