Factory Order Books Aren't So Fat Anymore But So What?

Although durable-goods orders rose nicely in the first quarter, unfilled orders--a leading economic indicator--have been falling, as shipments have outpaced orders. And as some skeptics see it, as long as the backlog of orders is shrinking, manufacturers will be slow to expand output and jobs.

Not to worry, advises economist Maury N. Harris of PaineWebber Inc. He points out that in the postwar period, the statistical correlation between orders and durable-goods output (and jobs) has been significantly higher than the correlation between backlogs and employment and production. In other words, rising orders are more likely than rising backlogs to be accompanied by job and output gains. Harris also believes that the growing use of just-in-time ordering is continuing to put downward pressure on unfilled order levels.

Economist Joseph G. Carson of Dean Witter Reynolds Inc. adds another explanation: At the beginning of an upturn, he notes, incoming orders are skewed toward short-cycle products such as electric motors and household appliances. Outgoing shipments, meanwhile, are still largely composed of higher-priced long-cycle products. The result: a drop in order backlogs that isn't truly reflective of the economy's momentum.

"That's one reason," he says, "why order backlogs didn't turn up until the last recovery was five months old."

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