High Defense Spending Masks Weaker Factory Activity

Written by SK Ashby

The latest reading of the purchasing manager's index unexpectedly showed growth in manufacturing in December, but a new report directly from the Commerce Department tells us why factory activity increased for the first time in five months.

For almost every other industry, orders for manufactured goods declined by a significant amount, but orders for fighter jets and other aircraft funded by the Pentagon increased by nearly 170 percent.

“The strength in (factory orders) is a little misleading,” said Ryan Sweet, a senior economist at Moody’s Analytics in West Chester, Pennsylvania. “Fundamentals haven’t improved significantly for either manufacturing or real business equipment spending.”

Factory goods orders surged 1.8% in December, the largest gain since August 2018. Data for November was revised down to show orders tumbling 1.2% instead of dropping 0.7% as previously reported. Excluding defense, factory orders dropped 0.6% in December after edging up 0.1% in the prior month. [...]

Transportation equipment orders surged 7.9% in December, the biggest increase since August 2018, after plunging 8.2% in the prior month. Orders were boosted by a 168.3% jump in demand for defense aircraft and parts, which offset a 74.7% tumble in orders for civilian aircraft and parts. Motor vehicle and parts orders increased 0.5% in December.

I wouldn't necessarily say this doesn't count, but it's probably temporary and won't be reflected in upcoming months.

The manufacturing sector looks better than it otherwise would right now because of good old Keynesian economic stimulus or "socialism" from Uncle Sam.

Generally speaking, the economy as a whole looks better than it otherwise would right now because the government is running a trillion dollar deficit which is supporting a significant amount of economic activity in an economy with weak demand under pressure from Trump's trade war.

There's nothing necessarily wrong with the government running a deficit to support the economy, but Republicans would cry foul if a Democrat were sitting in the White House right now. Moreover, we're running a deficit to fund things that aren't sustainable.

If a Democrat wins in November, and if Republicans still control the Senate in 2021, the GOP will likely demand austerity and then blame Democrats if the economy falters.