For the second straight month, there has been a decline in factory orders and the latest revisions for March showed an even steeper drop than previously thought. The March reading had shown a decline of 1.5%, but revisions put that at 2.1%. April’s 0.6% reduction has added to the gloom when most analysts had been expecting the sector to hold steady.

However, this is one of the more volatile measures of the economy’s performance and there are always lots of caveats to contend with. The most important adjustment is to isolate transportation—especially airplane manufacturing. A good month for Boeing sends the index into orbit and a bad month tends to drag it down. Without the aircraft industry factored in, the factory orders decline was 1.1%, mostly on reduced auto demand.

The biggest shift took place in defense-related production (-21.5%). This is the part of the current reduction in U.S. commitment in the Middle East that will need to be taken into consideration in the future. Not only is there less need for the equipment manufactured to support the military in these nations but there will soon be millions of former military personnel returning to civilian status and seeking jobs. Add in the reserves and National Guard who will be expecting to resume their old careers, and the unemployment situation worsens.

The US economy can ill afford a major slowdown in the manufacturing sector, as this has been the lone bright spot in the economy for the past couple of years. The most important factor for manufacturing may be related to export activity at this point. The U.S. manufacturer has started to become adept at selling to other markets, and that is a good thing in general. The challenge is that U.S. producers now are subject to the vagaries of those other markets, and there has also been notable decline tied to European struggles.

-Chris Kuehl, PhD, NACM economist

(Note: Kuehl will be a prominent speaker at several events during next week’s 2012 NACM Credit Congress in Grapevine (Greater Dallas), TX. For more information on Kuehl’s session and Credit Congress itself, or to register, visit http://creditcongress.nacm.org. The conference begins on June 10).