Steady improvements in the manufacturing sector appeared to stall in May as a big drop in demand for new airplanes pushed total durable-goods orders down 1.1 percent, the largest decline since last August, the Commerce Department reported today. There was a small bright spot, however, as overall orders rose by 0.5 percent in May, the fifth rise in the past seven months. This signals there is momentum in the manufacturing sector.
Orders for machinery rose by a strong 5.6 percent in May. This is good news for two reasons. First, machinery has been a major force behind the rise in manufacturing employment by 125,000 jobs so far this year, accounting for about 1 in every 5 new manufacturing jobs. Second, machinery is one of the most export- engaged industries in the U.S. economy, with about 40 percent of sales destined for markets abroad. The fact that machinery orders remain robust is a positive sign that the export recovery remains under way. Given the rather lackluster economic news on the housing front that has come out in recent days, this is the silver lining in today’s report.
However, I do expect the pace of the manufacturing recovery will start to slow this summer for several reasons. First, the end of the homebuyer tax credit and the winding down of tax incentives to purchase energy efficient appliances will likely be a drag on some manufacturing industries after being a source of growth earlier this year. We saw evidence of a slowdown last month with the decline in orders for both fabricated metals orders — where the construction industry is a major purchaser — and electronic equipment and appliances. Still, most signs point to manufacturing continuing to lead the economic recovery and job creation.