US: Factory Orders

Tue Feb 03 09:00:00 CST 2015

Consensus Consensus Range Actual Previous Revised
Factory Orders - M/M change -2.2% -3.5% to 0.4% -3.4% -0.7% -1.7%

The headlines are once again very weak for the factory sector masking core readings that are less weak. Factory orders fell a very steep 3.4 percent in December for a 5th straight decline. This is the longest losing streak since the collapse of late 2008 and early 2009. Not helping is a full percentage point downward revision to November to minus 1.7 percent.

Turning first to the durables component, durables orders fell 3.3 percent in December, revised 1 tenth higher from the initial reading posted last week. But when excluding defense goods and civilian aircraft, which are two components subject to volatile monthly swings, durables orders actually rose 0.1 percent, breaking a string of three negative readings. Another core reading is also worth noting and that's nondefense capital goods excluding aircraft which slipped only 0.1 percent for, however, a 4th straight decline.

The non-durables component, weighed down by price effects tied to oil, has also been on a long losing streak, down a 6th straight month to a very sharp minus 3.4 percent. Both petroleum and coal products were especially weak in the month.

Weakness in the oil & gas sector is a key factor behind the run of weakness in the factory sector as a whole. Orders for mining, oil field & gas field machinery fell a steep 7.9 percent in December for the 3rd decline in 4 months, a decline that includes October's 18 percent plunge.

Manufacturing production as measured by the Federal Reserve in the industrial production has been respectable but this is not apparent in the shipments reading of the factory orders report which is compiled separately by the Commerce Department. Shipments in this report are down sharply, falling 1.1 percent in December for a 3rd straight decline. Inventories in December fell 0.3 percent but the decline was out of step with the greater decline in shipments, in turn driving up the inventory-to-shipments ratio to a less lean 1.34 from 1.33 and 1.32 in the prior 2 months. Unfilled orders are another negative in today's report, down 0.8 percent in a rare decline and the steepest since August 2012.

Weak foreign demand, tied in part to the strength of the dollar, together with slowing in the oil patch are pulling down the US manufacturing sector. Slowing in yesterday's anecdotal reports from Markit and ISM point to extending trouble for the manufacturing sector in January.

Market Consensus Before Announcement
Factory orders contracted for the fourth straight month in November, down 0.7 percent with minus signs sweeping nearly all major categories. The component for durables orders fell 0.9 percent in the month, revised down from minus 0.7 percent in the initial reading posted prior to Christmas. The non-durable goods component fell 0.5 percent reflecting weakness for food and petroleum products. Turning back to the durables side, transportation goods were especially weak, down 1.3 percent and reflecting a monthly swing lower for defense aircraft. Nondefense capital goods showed one of the few gains for the month, but only just barely at plus 0.1 percent. This reading when excluding civilian aircraft, which is considered a core reading for the industrial economy, fell 0.5 percent for a third straight decline.

Factory orders represent the dollar level of new orders for both durable and nondurable goods. This report gives more complete information than the advance durable goods report which is released one or two weeks earlier in the month.

Investors want to keep their fingers on the pulse of the economy because it usually dictates how various types of investments will perform. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers more moderate growth which is less likely to cause inflationary pressures. By tracking economic data like factory orders, investors will know what the economic backdrop is for these markets and their portfolios. The orders data show how busy factories will be in coming months as manufacturers work to fill those orders. This report provides insight to the demand for not only hard goods such as refrigerators and cars, but nondurables such as cigarettes and apparel. In addition to new orders, analysts monitor unfilled orders, an indicator of the backlog in production. Shipments reveal current sales. Inventories give a handle on the strength of current and future production. All in all, this report tells investors what to expect from the manufacturing sector, a major component of the economy and therefore a major influence on their investments.