US: Factory Orders

Fri Nov 03 09:00:00 CDT 2017

Consensus Consensus Range Actual Previous
Factory Orders - M/M change 1.2% 0.5% to 1.6% 1.4% 1.2%

Today's factory orders report, up 1.4 percent in September following a 1.2 percent rise in August, closes the book on what was a second straight strong month for manufacturing. The split between the report's two main components shows a 0.8 percent September rise for nondurable goods -- the new data in today's report where strength is tied to petroleum and coal -- and a 2.0 percent jump for durable orders vs 2.2 percent in last week's advance report for this component.

The key to this report is core capital goods (nondefense ex-aircraft). This is a central reading for business investment and the gains are very impressive: up 1.7 percent in September for orders which is 4 tenths higher than the advance reading with August revised 1 tenth higher to 1.4 percent. The gain in July stands at 1.3 percent. Also revised higher are shipments of core capital goods, up 0.9 percent in September following two prior gains of 1.3 and 1.0 percent.

The gains for core capital goods shipments are a boost for GDP as is a general inventory build underway, up 0.7 percent and 0.6 percent in the last two months. This build is very positive as manufacturers try to keep up with demand. The inventory-to-shipments ratio is unchanged at a very constructive 1.38. Other readings include a 0.8 percent rise for total shipments with unfilled orders showing less life, up only 0.2 percent. Given the strength in new orders, unfilled orders may soon be accumulating at a faster rate.

Gains in September and August do reflect extending strength for commercial aircraft orders which are always bumpy and may understandably ease in the months ahead. But the fundamentals for the factory sector, highlighted by capital goods, are very positive. And the one positive for the sector that has yet to appear, and that's production volumes in the Federal Reserve's industrial production report, look to bounce solidly higher based on hours data in this morning's employment report.

Market Consensus Before Announcement
Momentum has been emerging in factory orders and a breakout is possible for September. The durables side of the report is guaranteed to be strong given the 2.2 percent surge in the prior week's advance reading. Growth for non-durables is not expected to be quite as strong, pulling back the factory orders consensus to a gain of 1.2 percent. Year-on-year rates in this report are likely to move up a notch to the mid-single digits.

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.