The Economic and Social Research Institute of Japan released, today, data on machinery orders for April. Although total orders were up 3.1% from March, the HEADLINE series--Private Sector Orders excluding Volatile Orders (ships and electric power)--was down 3.3% from March, after increases in the first three months of the year and well below consensus expectations. Apparently the volatile orders were strong enough to overcome the decline in the traditional machinery orders in April.In view of the nuclear fallout as a result of the March earthquake and tsunami, it was probably electric power orders rather than ship orders that accounted for the strength in volatile orders.

Since private sector orders tend to presage the course of capital spending four to six months ahead, the decline in private sector orders suggests that the decline in fixed investment in the first quarter will continue into the second quarter. The first chart shows the monthly private orders excluding volatile orders and quarterly fixed capital formation. The correlation between the two series, once the orders have been aggregated to quarterly is .92.

The decline in foreign orders suggests that it will not be easy to continue to offset a domestic slowdown with increased exports. Domestic and Foreign orders are shown in the second chart. With the prospect of lower capital spending and exports, gross domestic product is likely to continue to decline in the second quarter. Economists affiliated with the Economic Planning Association are forecasting a 2.97% decline in second quarter gross domestic product after a 3.5% decline in the first quarter.

Note: Japanese machinery orders are found in Haver's Japan Database under Manufacturing and Trade: Shipments, Inventories and Orders: Product Detail: Machinery.