June 29th, 2012
Consumer spending on nondurable goods added 0.34-percentage point to the first quarter’s 1.9% rise in U.S. GDP, the largest contribution in five quarters. Given the heavy influence from falling petroleum prices, however, economists expect nondurable goods orders in May will have fallen for a third straight month. The extent of that fall, to be reported Tuesday, could offset the 1.1% gain in durable goods orders already reported and leave total factory orders negative again as well. For dealers, this prospect jeopardizes the current consensus on Q2 GDP growth of 2.0%.
In 2007, nondurable goods orders were the minority share (48.8%) of total factory orders (the rest being durable goods orders). In 2012, nondurables share of the total has shifted higher to 53.7%, taking on added importance to the recovery. Fuels prices have had a notable impact on the path of nondurable goods orders. Averaging the latest three months of available data, petroleum and coal products account for 28.2% of nondurable goods orders, making them chiefly responsible for the large monthly variation in factory orders. March’s 2.9% drop in petroleum and coal orders, for instance, undercut nondurable goods orders by 0.7%. April’s 4.4% drop* pushed nondurables down by 1.1%. Excluding pet/coal, nondurable goods orders would have risen 0.3% in March and 0.2% in April.
* April 2012 marked the largest decline in petroleum and coal products orders since a 7.9% decrease in July of 2009. In that month, nondurable goods orders fell by 1.7% and there hasn’t been a decline of that magnitude in the subsequent 35 months.
While consumer spending is thought to represent some 70% of GDP, spending on nondurable goods typically represents about 15%. After revising their Q2 GDP outlook lower to 1.3% q/q AR on Friday, HSBC Global Research wrote, “Spending growth for nondurable goods and services has been positive, but not strong enough to keep overall consumer spending growth from slowing down.”
Citigroup Global Markets expects growth of personal consumption expenditures on nondurable goods to improve to 2.4% in the second quarter, up from 2.1% in the first quarter and better than any other quarter this year. Indeed, it would be the highest percent change from the preceding period in six quarters. In the forecast supplement of their week ahead newsletter, Citi economists wrote Friday, “Factory orders probably were up slightly in May as the continued decline in oil prices largely offset the already reported increase in durable orders. Daily oil prices suggest that nondurables will decline again in June.”
Economists at CIBC World Markets have not ruled out a rise in nondurable goods in May. In their preview of Tuesday’s factory orders report, CIBC wrote, “Durable goods orders rose by an above-consensus 1.1% in May, although much of the improvement was due to the volatile transportation sector. Assuming non-durable orders follow a similar path to the ex-transport element of durable goods, and post only a modest rebound, overall factory orders could rise 0.7% in May.” Holding durable goods constant (a nervy assumption as they’re often revised more than 0.5% from the advance report), nondurable goods would have to have risen by 0.5% in order to achieve CIBC’s rosier factory orders forecast.
The problem with sluggish demand for nondurables extends to the labor market as well. Since the recovery began in July 2009, employment in durable goods industries has risen by 4.1%, while job growth in nondurable goods industries has fallen by 1.5%. In just the last nine months, durables employment has expanded 2.5% but nondurables employment has risen only 0.1%. Growth was negative in both April and May (down 2k and 1k, respectively) and economists expect flat to negative growth in June. Meanwhile, according to BLS figures supplied by RBS Securities, nondurable goods manufacturing has one of the highest ratios of long-term unemployment as a share of the labor force (1.41:1). That is worse than the 1.17:1 for durable goods manufacturing industries but better than the ratio for the construction industry (1.64). Data from the Job Openings and Labour Turnover Survey (JOLTS) provide further evidence of structural problems facing nondurable goods workers.
Finally, strategists at UBS Investment Research note the sharp lag in industrial production for consumer nondurable goods compared to total factory output. “Further reflecting near-term demand challenges, the US industrial production index for consumer nondurables has shown a fairly shallow recovery, materially under-performing the broader industrial production index. While the overall index is only 5.5% below 2007 peak, the index of consumer nondurables trails mid-2007 levels by nearly 11%.” UBS further observes how U.S. containerboard/box demand is highly correlated with production of consumer nondurables (95% long-term correlation). “We believe this reflects cyclical and not secular factors and would expect further recovery over time.”
Set between ISM PMI on Monday and the nonfarm payroll report on Friday, the behavior of orders and inventories in Tuesday’s May factory orders report will fine-tune dealers’ estimates for Q2 GDP growth. Should nondurable goods orders fall by more than 0.8% in May, they will push total factory orders down for the fourth time in five months and to their lowest level since at least October 2011. Moreover, if cascading oil prices took down nondurable goods orders in May, they likely did in June as well. Other aspects of demand for (and production of) nondurable goods show only minor growth, keeping the sector out of the modest U.S. recovery.