Back-to-Back Decline in Ex-Transportation Factory Orders

The combined report of factory orders for August and September revealed weakness in orders activity leading up to the government shutdown. Outside the volatile transportation sector, orders fell both months.

So Why the Double Header for This Indicator and Not Others?

Today the Commerce Department took the unusual step of releasing the August and September factory orders reports concurrently. As has already been widely reported, this is due to the October government shutdown. But some background might be useful here to understand why we get a “double header” for the factory orders report, one of the select few to receive this treatment.
In a typical month, the factory orders report follows about a week behind the durable goods orders report. The “new” data in factory orders is concentrated on bookings for non-durable goods, though sharp market watchers look for revisions to the previous week’s durable goods orders numbers as well. At present, the non-durables orders comprise a slightly greater than 50 percent share of all orders. But, as the middle graph shows, durable goods held the dominant position prior to the recession and appears to be on track to regain the larger share.

The August durable goods report hit the wire September 25th just days before the shutdown began on October 1st. The timing of the shutdown happened to fall in the week that separates the durables and factory orders reports—this is the reason why we get the combined August/September report. It made more sense to simply pick up the normal schedule with the advance durable goods report last week and combine factory orders into one report released today.

So, to some extent, we already had an idea of how orders activity held up during these two months through the durable goods reports. What emerged from those reports was a picture of weaker orders for core capital goods disguised by a September surge in aircraft orders.

What Did We Learn That Was New?

The new data contained in today’s report suggests deterioration in manufacturing orders for both August and September. Non-durable goods orders fell 0.6 percent in August and another 0.2 percent in September. The headline increase of 1.7 percent in overall factory orders was mostly attributable to a 57.7 percent surge in aircraft orders. Even with the help from aircraft, the September increase was not nearly enough to offset the 2.8 percent drop in July and the 0.1 percent decline in August.

Outside the volatile transportation sector, orders fell 0.4 percent in July and another 0.2 percent in September. Core capital goods orders are now falling at a 7.2 percent annualized rate.

Were it not for generally strong purchasing managers’ survey data we would be getting quite pessimistic about the outlook for the factory sector. It will be interesting to see if October orders figures live up to the generally bullish sentiment we have seen in the surveys.