Weakness Persists for Factory Orders

Factory orders fell 0.2 percent in January, despite expectations for a slight gain. This marks the sixth straight month of declines, as weakness in nondurable goods orders offset a gain for durables.

Nondurables Weighing on the Headline

Despite the more encouraging durable goods orders report last week, overall factory orders fell yet again in January. Factory orders for all manufacturing industries fell 0.2 percent, short of consensus expectations for a small gain. Stripping out the volatile transportation component, orders were down an even more disappointing 1.8 percent. However, durable goods orders were up 2.8 percent on the month (top chart), so the underlying details of this report are mixed.

Nondurable goods industries accounted for all of the weakness in January and fell 3.1 percent on the month. A breakdown of other industries paints a mixed picture of the current manufacturing environment. Transportation posted an impressive 9.7 percent gain; however, this comes as the notoriously volatile nondefense aircraft sector rose 128.7 percent. As we noted in our durable goods write-up last week, January is a typically weak month for aircraft orders, so we suspect the outsized increase here is more a function of seasonal adjustments and a weak December. Motor vehicles & parts orders were flat on the month but are up 9.7 percent from a year ago. Machinery orders were up 1.4 percent on the month, with mining, oil field & gas field machinery also up 2.5 percent, reversing some of the weakness seen in December. Computers & electronic products were up 1.7 percent, while the other half of the major sub-sectors all posted declines. Core capital goods orders (excluding defense and aircraft) were up 0.5 percent, marking the first increase in the past five months, but are still falling at an 8.6 percent three-month annualized pace (middle chart).

Shipments were also weak on the month, as both durable goods and nondurable goods posted declines. Some of this weakness could be due to harsh winter weather, which we saw for much of January and February. Some of the weakness in shipments can be credited to the recent oil price decline story. The value of petroleum refinery shipments fell 11.6 percent after another sizable drop in December of 15.8 percent. While we have seen continued weakness in nominal shipments, the latest data from the Energy Information Administration continues to show U.S. crude oil production, which is measured in volume terms, reaching all-time highs. The most recent data point is from December, so we may begin to see a pullback in the first couple months of this year.

Inventory-to-Shipments Ratio Jumps Higher

Inventories fell just 0.4 percent on the month, marking the second straight decline of this magnitude. However, shipments have been falling faster than inventories, as we have seen the inventory-to-shipments (I-S) tick up in recent months, reaching 1.36 in January (bottom chart). This is the highest reading since mid-2009 and continued upward movement here may be an indication of imbalance for manufacturers.