Merk Investments: Factory Orders: August 2008
The August estimate of factory orders saw declines across the board in just about every category, save defense. The headline fell -4.0%, the core ex-transportation component declined -3.3%, the ex-defense estimate dropped -4.2% and the ex-computer measure fell -4.1%. Orders for capital goods dropped -6.0% and non-defense orders for capital goods fell -7.9%. Shipments of non-durable goods fell -3.3% and shipments of non-defense capital goods ex-aircraft fell -2.1%. The inventory to shipments ratio increased to 1.26 months.
The sharp decline in factory orders in August represented the slowest month of orders in nearly two years. The decline, which preceded the recent credit crunch, is indicative of the weak condition of aggregate demand and the slowing in orders from the external sector. Over the past month the Baltic Dry Index and futures for commodities looking forward both suggest that the support from the external sector will continue to decelerate in coming months.
The downward movement in the cost of basic inputs, the sharp declines in the fortunes of the manufacturing sector and the clear decline in retail/wholesale sales doest tend to strongly suggest that the economy is decelerating at a sharp rate in the third quarter of Q3’08. Looking at the data and the probability that personal consumption will contract for the first time since 1983, the way is clear for a Fed rate cut ahead of its scheduled October 29 meeting.
Joseph Brusuelas
Merk Investments
Chief Economist/VP Global Strategy
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