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Manufacturing report - is tech finally looking up?

The preliminary numbers for November 2008 manufacturing were released today. Headline numbers on factory orders were terrible - twice as bad expected: down four consecutive quarters and falling by 4.6% month-over-month.

Focus on tech --

We previously wrote on the advance number for November and focused on the tech sector (to read it, click this link to that post).

As our proxy for tech, we'll again look specifically at the Computers and Electronic Products category. This segment includes computers and related products, communications equipment and semiconductors.

In today's release there were some small downward revisions for Shipments but some small upward revisions for New Orders.

The following chart shows the situation with Shipments:

Computer & Electronic Products Shipments, Nov-2008 prelim
At a summary level, Shipments were down 4.5% month-over-month from October to November but down only 1% year-over-year.

Some of the most hard-hit sub-categories were as follows:
  • Computers: down 12.4% month-over-month and down 11.1% year-over-year
  • Audio & Video Equipment: down 9.8% month-over-month and down 17.3% year-over-year as consumer electronics cratered
  • Semiconductors: down 22.5% month-over-month and down 8.8% year-over-year
  • Computer Storage Devices: down 7.8% month-over-month and down 3.8% year-over-year
Defense, communication and medical equipment managed to increase Shipments modestly which helped keep the summary number from being even worse.

The following chart shows New Orders:

Computer & Electronic Products New Orders, Nov-2008 prelim
At a summary level, New Orders were actually up 6% month-over-month from October to November and down only 0.5% year-over-year.

Looking at some of the sub-categories there is more good news than bad:
  • Computers: show surprising improvement with New Orders up 22.4% month-over-month. Tempering this positive development, however, we see New Orders are actually down 10.1% year-over-year
  • Non-defense Search and Navigation Equipment: orders up a whopping 95.4% month-over-month and up a quite respectable 5.6% year-over-year
  • Defense Search and Navigation Equipment: orders up 19.1% month-over-month and up 1.2% year-over-year
In the previous post we presented the equation used to calculate New Orders:

NewOrders (current) = Shipments (current) + UnfilledOrders (current) - UnfilledOrders (prior)

Note that Unfilled Orders are an important component in the calculation. To provide some insight into how Unfilled Orders impacts tech stock performance, we have plotted Unfilled Orders against the monthly closing price of the Technology SPDR ETF XLK.

Computer & Electronic Products Unfilled Orders, Nov-2008 prelim
It can be seen that Unfilled Orders have been moving steadily upward while tech stock performance as exhibited by XLK has moved rapidly downward.

The government also provides data on the ratio of Unfilled Orders to Shipments. We have presented this data compared to XLK.

Computer & Electronic Products, Ratio Unfilled Orders to Shipments, Nov-2008 prelim
During the last few months this ratio has been accelerating upward as the numerator, Unfilled Orders, has increased gently and the denominator, Shipments, has decreased sharply.

Conclusion --

The headline number had New Orders down 4.6% but we find the Computers and Electronic Products category is boasting a 6% increase in New Orders. Is technology bucking the trend here?

I mentioned in the last post that in the normal course of business some orders are inevitably canceled and thus do not directly convert to future shipments.

What I think these charts demonstrate is that orders are indeed being canceled. Each month New Orders and Unfilled Orders, as measured here by the manufacturing survey administered by the U.S. Census Bureau, are slowing but not nearly as rapidly as shipments have slowed. In other words, these orders do not seem to be turning into shipments. And tech stocks have plunged as a result.

In conclusion, it is good that orders are up but that is not enough to signal the "all clear" for the tech sector. Until we can see a trend of increasing shipments or at least a chart where shipments are no longer dropping, it is best for tech investors to stay on the sidelines.


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I generally give less importance to Shipments since this is a backward looking measure reflecting orders that have been confirmed, manufactured and shipped. It's similar to earnings reports -- it's good to know but the data is in the past and we're more interested in the future. The following chart shows how September shipments looked for the overall tech sector:

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