US: Factory Orders

Thu Oct 05 09:00:00 CDT 2017

Consensus Consensus Range Actual Previous
Factory Orders - M/M change 1.0% 0.4% to 2.2% 1.2% -3.3%

Increasing strength in capital goods is the good news in today's factory orders report where a headline 1.2 percent gain is 2 tenths above Econoday's consensus. The split between the report's two main components shows a 2.0 percent gain for durable goods, which is a 3 tenths upgrade from last week's advance report, and a 0.4 percent gain for non-durable goods which is the fresh data in today's report and reflects gains for petroleum and coal. Hurricane Harvey's late month impact was not able to be quantified by the Commerce Department though its effects appear to be marginal.

Sticking to durables, today's report upgrades core capital goods orders (nondefense ex-aircraft) to monthly gains of 1.1 percent in August and 1.3 percent in July versus prior readings of 0.9 and 1.1 percent. Shipments for core capital goods, which are inputs into GDP business investment, are revised a very sharp 4 tenths higher in August to 1.1 percent offset only in part by a 1 tenth downward revision to July to what is a still very sharp gain of 1.0 percent.

Commercial aircraft is always volatile in this report with orders up 72 percent following a drop of 83 percent in August-to-July swings that are behind the monthly swings in the headline. Vehicles are another positive in today's report, up 0.7 percent for orders following a 2.2 percent drop in July. Excluding transportation equipment, which is considered a smoother barometer for underlying change, orders are up 0.4 and 0.5 percent the last two months.

Unfilled factory orders were unchanged in the month following the July's 0.3 percent decline. Weakness here is not a positive indication for factory labor demand. But shipments, up 0.5 percent, are very favorable as are inventories which are keeping pace with a 0.4 percent rise that keeps the inventory-to-shipments ratio unchanged at 1.38.

The strength in ex-transportation and especially capital goods are outstanding positives and help offset what has been a very disappointing run in the manufacturing component of industrial production, a separate report released by the Federal Reserve, where August fell 0.3 percent and July was unchanged. Today's factory orders report closes the book on what was, despite Hurricane Harvey, a mostly strong August for manufacturing.

Market Consensus Before Announcement
Factory orders are expected to rise 1.0 percent in August in what would be an aircraft-related bounce following July's 3.3 percent decline. Aircraft swings aside, underlying data have been mostly solid especially orders and shipments for core capital goods which point to strength in business investment.

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.