US: Factory Orders

February 3, 2017 09:00 CST

Consensus Consensus Range Actual Previous Revised
Factory Orders - M/M change 0.9% -0.2% to 3.8% 1.3% -2.4% -2.3%

Price effects for petroleum and coal gave a deceptive lift to factory orders in December which rose 1.3 percent. A 3.1 percent jump in nondurable orders, reflecting higher energy prices, masks a 0.5 percent decline in durable orders.

Yet the drop in durables itself reflects an anomaly, that is a swing lower in defense aircraft. A clear plus in December is strength in capital goods data where the core reading (nondefense ex-aircraft) rose 0.7 percent following gains of 1.7 percent and 0.5 percent in the prior two months. These readings point to rising business investment for 2017.

Apart from new orders, shipments surged 2.2 percent in the month in part reflecting a gain for civilian aircraft where monthly readings are always bumpy. Inventories growth was contained to only 0.1 percent in the month, which is a positive for future production, while unfilled orders, however, sank for a second month, down a sharp a 0.6 percent which is of course a negative for future production and also future employment growth.

This is always a very volatile report with large components often making large month-to-month swings. But behind the noise is a factory sector that is still struggling but, driven by new business investment, may be showing emerging signs of momentum going into the new year.

Market Consensus Before Announcement
Factory orders are expected to rise 0.9 percent as price-related gains for nondurable goods are expected to offset a 0.4 percent decline in the just released durables component of the report. Much of the weakness in the durables headline was tied to a monthly reversal in defense aircraft which masked solid improvement in other parts of the report especially for core capital goods (nondefense ex-aircraft).

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.