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There are a few problems in this report -- specifically;

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Inventories of manufactured durable goods in May, up twenty-eight of the last twenty-nine months, increased $1.8 billion or 0.5 percent to $365.8 billion. This was at the highest level since the series was first published on a NAICS basis in 1992 and followed a 0.3 percent April increase.

Inventories are bad, not good. They represent expected forward demand, of course, but the bad is that they're "idle capital having been spent but not yet put into productive use." If it never goes into productive use, or only does so at a big dicount, then the damage is compounded.

However, the two indicator items I look at in the report as a forward demand indicator both firmed up a fair bit -- computers and communications equipment.

Maybe I am reading something into this incorrectly but it definitely gives me pause. I know of a local business that had 250 employees 4 years ago and had a 2-year backlog on orders. They were working 40+ hours a week and basically anyone could get all the OT they wanted. Well, when the hard times hit not only did that 2-year backlog of orders vanish, they were out of business in 8 months. They went from a 2-year backlog to only 6 weeks worth of orders for the next quarter in 6 months.

Now, looking at this data, the inventory build tells me that across the whole economy we are already over producing. Even with the increase in orders we still had an inventory build. Not only a build, but to an all-time high level.

Yes, things could go either way but, taken as a whole across the whole economy, it appears that if orders don't continue to rise, we are in for a manufacturing slowdown just because the channel will be full if nothing else.

My bottom line is this: with the way our politicians are behaving and have indicated how they will behave in the future, I just can't get optimistic about the economy.

Flap

Correct.

You want backlog, not inventory.

So how does this square with the Philly or Richmond Fed reports ? They were down from prior month(s), but this isn't ?

Durables are a small segment of the economy.

When I started working for my present employer in December last we were working flat out with lots of O/T until February to catch up with back orders. Our "busy" season is supposed to be from April to September now very flat with very little O/T . We did get a couple of big orders but also lost some. Good news is we have a big contract coming up in October , but to fulfill this a $1.5mn laser cutting machine has had to be ordered and delivered in September and a new press has been installed too. The owner is a smart guy and I think spending that money to get a $8mn contract is good business. The companies strength comes from being versatile. I just hope the economy hold together long enough.

P.S.another BP oil disaster would be good for business, the company could not make anchors for the oil booms fast enough.

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Durables are a small segment of the economy.

Not knocking on Gen at all, just making a comment here in question form.

My Ph.D. is in Production and Operations Management. When I started the Ph.D. program in 1987 there was already a lot of talk, and a lot of movement into a service economy. In fact, a number of universities no longer require all of their business students to take a course in P&OM (now often called just OM). In fact, at many business schools only about 25% of the business students are required to take an OM course. Now, on to the question...

How's this sevice economy working out for everyone?

Flap

Like ****.

Flap -- it sucks rocks. Big, sharp, dusty rocks.

The service economy amounts to us taking in each others' laundry. Well, one b--t--d stole half my shirts, and another one left me with skivvies that are the wrong size and really thoroughly used, if you get my drift...

Tully

Ahh yes, the service economy is sickig bigtime. I knew way back in 1987 when looking back I didn't know much at all, that it was going to lead to problems. Yes, paying someone to clean your house so that you can sit around and watch TV at night instead of cleaning it yourself definitely adds to GDP.

A few years ago when we were making some curricular changes it was even suggested that we drop OM where I'm working now. Of course I opposed the change and I even stated in a faculty meeting that OM is the most important course in Business. Some of my colleagues laughed thinking that I was just using rhetoric to defend the course I teach and maybe I was to a small extent, but I was serious too.

FWIW, we still make a great deal of "stuff" in this country, it is just that technology plus laws have created an environment where machines are very, very often a better choice than labor. Capital substitution for labor as the economists say. Some companies are starting to in-source production again after realizing that China is not everything they hoped that it would be, I just hope for their and our sake that the Chinese weren't able to steal all of their technologies before they left.

Flap

P.S. Back to the original post. If we are heading into a recession with the warehousing/distribution channel the fullest its ever been, there will be one hell of a drop off in manufacturing and manufacturing employment. I'm talking like hitting a double-thick, adamantium backed brick wall. The logic I'm using says that manfacturing will slow well below the demand rate in an attempt to stay profitable and clear out the over-supply in the channel at the same time. All-in-all not a good mixture.