Factory Orders Down, Supply Chain Trickledown in Effect

December new factory orders down 3.9%

WASHINGTON (MarketWatch) -- Showing persistent troubles for the manufacturing sector, new orders for manufactured goods fell 3.9% in December for the fifth consecutive month of declines -- the longest downward streak since comparable data was first published in 1992, the Commerce Department reported Thursday.

Economists polled by MarketWatch were looking for a decline of 3.3%. New orders for durable goods fell a revised 3%, compared with a prior estimate of a 2.6% decline. New orders for durable goods also reached five consecutive months of declines for the longest streak since comparable data has been published.

Nondurable goods orders in December fell 4.8%, compared with 8.7% in the prior month. Core capital equipment orders fell 3.2% in December, compared with a gain of 1.1% in the prior month. Shipments of manufactured goods in December fell 2.9%, declining for five consecutive months in the longest streak since 1998.

Inventories in December fell 1.4%, the largest decline since comparable has been published.

As new orders decline, shipments will also decline and inventories will then decline. Remember that the buildup in inventories is what kept GDP higher than thought. This may or may not be the case going forward.

A decrease in demand will lower the quantity demanded, putting downward pressure on price. (Deflation?) A reduction in the supply of goods will mean less will be produced (what this information suggests). A reduction in supply comes at the expense of jobs, since less is needed, fewer hands are also needed. This will cause layoffs and falling stock prices (and then more layoffs). This in turn will lower the demand for goods (More Deflation?), meaning that less will be produced ...

This to me looks like a drop in aggregate demand. I remember a video one of my professors used to illustrate the effects of a drop in aggregate demand.

There was a farmer with a basket of little chicks (that would normally end up as chicken dinners) and he was pouring them into bucket of water to drown them (I hope this practice is illegal now). The guy was pretty upset about the whole thing, but it would cost more to raise the chickens than to sell them, so he was only acting in his own self interest.

Two things:

1. I was surprised they could show this on television, it was pretty gruesome.

2. It hit home the fact that economic incentives can make for some pretty hard choices. I am not sure what the farmer will do next: if it is more expensive to work than to not work, what do you do? Where does it end?