For Manufacturing Data, Boeing’s Big Orders ARE Better – Deceptively So


Yesterday’s Commerce Department headline  number led a number of reporters and analysts to conclude that the US Manufacturing Sector was experiencing a solid comeback.  An increase of 3%, month-over-month, surely signaled a solid upswing in manufacturing, right?

And with that, scads of new jobs, right?

Well… right?

Not so fast.

Remember that the “Manufacturing Sector” includes “Transports”, a sector of manufacturing mostly comprised of the big behemoth we call “Boeing”.  When Boeing’s successes and failures are added into the Manufacturing Orders statistics, its the equivalent of including  roller-coasters in an analysis of the grade of  the nation’ railroad tracks inclines and declines.   A large Boeing order can boost the entire manufacturing sector, at least statistically.  But a cancellation or delay can weigh down the whole sector, too.  Boeing’s “ups” and “downs” are decidedly more pronoounced in an otherwise stagnant economy.  At roughly 15% of the manufacturing sector, the  fortunes of Boeing and other Transport Sector giants can effect the perception of the entire manufacturing sector.

The problem becomes clear when you eliminate “Big Boeing” and other smaller players in the transport sector from the manufacturing data.  Doing so reveals that the trend for other US manufacturing in February is down, not up. And if you look at the Manufacturing sector net of  Transports, its clear that since January 2012, that element of the manufacturing sector has been as flat as Ted Williams’ EKG.

Boeing’s spate of order cancellations and its recent troubles with its 787 Dreamliner have always  skewed manufacturing data, but the effect has been particularly pronounced  since at least July of 2012, when  United Airlines ordered 150 Boeing 737’s worth $14.7 billion at list prices.  Less than a week later, though, Dubai Aerospace Enterprise, the Dubai aircraft leasing company, cancelled an order for 35 Boeing 737 jets worth $2.4 billion at list prices.

The effect was skewed in August, too.  That’s when Quantas cancelled an $8.5 billion order for Boeing’s new Dreamliner because of production delays and Quantas’ own losses on some international routes.   But Japan’s ANA air carrier quickly restored part of that lost order with an order for eleven new 787 Dreamliners with a list price of $2.7 billion.   That order came just days after Avalon, the aircraft leasing company, ordered $2.4 billion worth of the new 737MAX aircraft.  But the home-run came October 1, 2012, with the announcement that Brazilian airline GOL Linhas Aereas Inteligentes had ordered sixty 737 MAX airliners at a cost of $6 billion.

All Nippon Airways Boeing 787-8 Dreamliner JA801A OKJ

So, all told,  from late August until the first day of October — not even five weeks — Boeing went from losing $8.5 billion in orders to adding $11.1 billion, a net swing of $19.6 billion (ignoring standard order discounts). That’s a small number, relative to the rest of the economy’s orders.  But in terms of measuring month-to-month changes in orders, its huge.  And that huge swing had a huge effect on the Commerce Department’s  manufacturing statistics.

More recently, Boeing’s orders collapsed in January, going from 183 to just 2, according to the linked blog, only to skyrocket again in February, when Boeing reported it had  191 new orders “in the first two months of 2013” in early March.

As shown in the chart below, where the organge line represents changes in the percentage of orders for the Transport sector, these feast and famine order numbers for Boeing and lesser players in the transport sector skew the data so much that they can make the total manufacturing number (in green) appear to be doing exactly the opposite of what the wider non-transport  manufacturing sector of the economy (in black) is doing.

But there are other aspects of the skewing, too:

  • Manufacturing other than in the transport sector has been relatively steady, at virtually no real growth since at least January of 2012.
  • Workers in the Tranport sector tend to be skilled, union employees with generous benefits.  Others in the manufacturing sector tend to be less unionized and earn much less.  If policymakers assumes manufacturing is doing better, they’ll assume that all manufacturing workers are doing betterl when that’s not necessarily true.
  • Workers in the Transport Sector tend to stay on even when their order book is as volatile as Boeing’s has been.  But workers in other segments of the transportation sector tend to work for smaller firms with lower capital reserves, so they tend to be laid off and re-hired more often than workers in the Transport sector.  If the Manufacturing Sector appears to be doing well when its not, there can be profound public policy implications.
  • Boeing, being the biggest influence in the Transport sector, is mostly located in Washington State.  Its successes and failures in securing orders has considerable implications for the economy of Washington, but far less effect for  the economy for the rest of the country.

 

(Click the caret in the upper left corner if the entire chart is not visible., or click here for a larger version.)

There should be no question that including Transports in the Manufacturing sector distorts and, often, misrepresents the broader view of the American economy; we’ve long known that.  Its why Census has long maintained manufacturing data excluding the transports.  But its probably time for that to stop.  Instead, the Commerce Department  should simply present “Transports” and “Other Manufacturing” as separate numbers.

In a stagnant, low-, n0-, or negative-growth economy, the success or failure of a behemoth like Boeing – a single company – can have a pronounced  implication on economic perceptions for policymakers, market analysts, and economic observers.

It should stop.  The Commerce Department should err toward transparency with its data.

 

 

Posted in Economics