Factory Orders Fall More Than Expected in August

Factory orders fell 10.1 percent in August, reversing nearly all of the previous month’s gain as a sharp decline in durable goods orders weighed on the headline. The inventory-to-shipments ratio ticked up slightly.

Do Not Fear the Headline

Following the 10.5 percent surge in July, factory orders fell back 10.1 percent in August. While this decline was larger than expected, the consensus was looking for a sizable pullback following the massive rise in aircraft orders the previous month. However, looking at the headline figure on a year-over-year basis, manufacturers’ new orders are still up 4.1 percent (top chart). Through the volatility of the monthly data, the trend remains positive and underlying details continue to be more encouraging.

In fact, “core” capital goods orders (excluding defense and aircraft) were actually up 0.4 percent, which provides a better indication of future business spending and thus where the economy is heading. Further support for the factory sector going forward is shown by the unfilled orders component. Unfilled orders for durable goods were up 0.6 percent in August, marking the 16th increase in the past 17 months. The improvement was broad-based, with only the defense sector posting a modest decline for the month. Further strength in unfilled orders should be a windfall for overall activity as it indicates growing demand and increased potential future activity.

There is not much by way of significant revisions from last week’s advance report on durable goods orders, as today’s report shows durables falling 18.4 percent compared to an initially-reported 18.2 percent. Looking at a breakdown of orders, multiple industries posted solid increases including computers & electronics, communications and electrical equipment. Shipments proved to be a weaker component, as we saw a 1.0 percent decline on a month-over-month basis, with a sharp decline in motor vehicles & parts affecting the headline. However, the underlying trend remains strong, as shipments are up at a three-month annualized rate of 9.4 percent (middle chart). Inventories also increased 0.4 percent in August, pushing the inventory-to-shipments ratio up slightly to 1.30, but remain in line with levels seen for the majority of the recovery.

Nondurable goods orders posted a more modest decline of 0.4 percent in August as drops in apparel, textile mills and petroleum refineries weighed on the overall number. The decline in petroleum refineries is unsurprising, as energy prices have taken a hit in recent months and these figures are nominal. Despite the sequential drop, nondurable orders are still up 1.2 percent year-over-year on a three-month moving average basis (bottom chart).

The factory sector continues to find itself on solid footing despite the recent volatility we have seen in monthly figures. Although we saw a slight pullback in the ISM manufacturing survey, the headline number remains comfortably in expansion territory and near this cycle’s high. Regional PMIs also continue to show further improvement and we look for business fixed investment to rise a solid 7.9 percent in the third quarter.