Customer orders for civilian aircraft were the strongest since Boeing's 737 Max was grounded.
Joe Raedle/Getty ImagesThe chip shortage, shipping delays, and other supply constraints are starting to show up in the economic data. To the extent that these problems reflect the continuing impact of the pandemic, they should dissipate as vaccinations continue to accelerate. Other problems will be resolved only with some combination of lower demand and more investment in productive capacity—and the fastest way to generate those outcomes is through higher prices.
Start by looking at the motor vehicle sector, which has been hit hard by the shortage of microprocessors. Barron’s noted last week that the Federal Reserve’s measure of motor vehicle and parts production fell more than 8% in February compared to January, shaving off about 0.5% from the total manufacturing output index. The latest data from the Census Bureau show that orders and shipments fell even further, with a commensurate rise in the value of manufacturers’ inventories.
That suggests the bad weather in February—plus the fact that demand had spiked in January with the disbursal of $600 stimulus checks—held back demand even more than the chip shortage held back production. Interestingly, retail spending on motor vehicles and parts fell by only 4% in February, which is significantly less than the drop in manufacturers’ shipments or the drop in manufacturing production. Since manufacturers’ inventories rose, that suggests that dealer and wholesaler inventories must have dropped.
Unlike the automotive sector, the civilian aerospace sector had its best performance in February in nearly two years. The industry had been in the doldrums ever since Boeing’s 737 MAX was grounded in March 2019 for safety problems. Customer orders for civilian aircraft and parts from April 2019 through December 2019 were 48% lower than in the equivalent period in 2018. Then the pandemic hit. The collapse in air travel pushed airlines to cut costs by canceling more than $41 billion of orders for new planes and parts from March through August 2020. The net effect was a 33% increase in the value of manufacturers’ unsold inventories between March 2019 and November 2020, even as the backlog of unfilled orders fell by 20%.
The good news is that this process may finally be reversing. The arrival of multiple effective vaccines means that an end to the pandemic is in sight, which should be a boon for the airlines. At the same time, regulators in the U.S., Europe, and other major markets have been clearing a new version of the 737 MAX for passenger travel since the end of last year. The result is that manufacturer’s unsold inventories of nondefense aircraft and parts peaked in November 2020 and have since dropped more than 7%. Meanwhile, new orders of civilian aircraft in February were higher than in any month since March 2019. That’s helped lift the backlog of unfilled orders for the first time since the pandemic began, and by the most since early 2018, when the global economic growth rate was peaking.
Outside of motor vehicles, defense capital goods, and civilian aerospace, the core durable manufacturing sector had a solid February. New orders were essentially unchanged from the high hit in January and manufacturer’s inventories continued to gradually rebuild after the drawdowns over last summer. The one wrinkle is that manufacturers’ shipments fell more than 1%.
Historically, orders have tended rise slightly faster than shipments—or fall less slowly—with plenty of month-to-month volatility reconciled by small changes in inventories. So far, there isn’t yet much reason to worry, although it’s possible that the gap this time could reflect difficulties with transportation, bad weather from last month’s deep freeze, or manufacturers’ troubles sourcing components, such as chips.
Write to Matthew C. Klein at matthew.klein@barrons.com
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