US: Factory Orders

Thu May 03 09:00:00 CDT 2018

Consensus Consensus Range Actual Previous Revised
Factory Orders - M/M change 1.3% 0.5% to 1.8% 1.6% 1.2% 1.6%

February and March were good for the nation's factory sector with new orders up 1.6 percent in both months. Aircraft orders were very strong in both months excluding which, along with other transportation equipment, orders were much more subdued, at gains of only 0.2 percent in February and 0.3 percent in March.

Orders for metals, including both steel and aluminum, did rise in sharply in March, a month when import duties were imposed, but sizable monthly gains (as well as losses) are routine for these readings where volumes, compared to the whole, are small. Inventories for steel and aluminum also rose sharply in March, but again not out of the ordinary.

Orders for capital goods (nondefense ex-aircraft) fell 0.4 percent but follow March's strong 1.0 percent gain. Business investment has been very strong (as highlighted in yesterday's FOMC statement) but a second month of decline in April for capital goods would definitely raise questions. Construction materials, an area to watch for tariff effects, also slipped 0.4 percent and follow a 0.3 percent gain in February.

The split between order gains for durable and nondurable goods is 2.6 percent for the former, again reflecting aircraft, and 0.5 percent for the latter reflecting gains for coal and petroleum.

An important positive in today's report is an outsized 0.8 percent rise in total backlogs where builds until now have been mostly modest. Inventories rose a steady 0.3 percent in a March report which, in sum, points to an aircraft-led factory sector that looks to contribute significantly to the 2018 economy.

Market Consensus Before Announcement
The durable goods report for March showed headline strength which will give a boost to March factory orders where the consensus is calling for a 1.3 percent gain. But some details of the durables report were soft, especially capital goods orders which are pointing to slowing 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.