Factory Orders a Bit Softer, Is Midyear Strengthening Intact?

The 0.4 percent gain in July factory orders was half a percentage point below consensus expectations, but it also comes on the heels of a 0.4 percentage point upward revision to June—so only a slight miss.

Must Have been a Good Halftime Pep Talk

Nondurable goods orders fell 1.3 percent in July, which held back the overall gain for factory orders in the month. The weakness was primarily driven by refined petroleum products, which fell 7.8 percent. The drop was likely price related, as oil prices fell roughly 15 percent over the month. On the durables side, there were only a few signs of weakness. Orders for primary metals, industrial machinery and computers all fell during the month. The largest decline within durable goods, however, came from defense aircraft spending, so that should not count as a bad sign for business spending prospects.

There are indications in this report that the business spending environment is improving somewhat. Core capital goods orders increased 2.1 percent in July, the second straight monthly gain and a welcome turnaround after core capital goods orders were negative in four out of the first five months of the year.

Business spending was a key vulnerability for the U.S. economy in the first half of the year. July factory orders figures indicate an improving outlook and strengthen the argument that first half weakness in equipment spending may be fading. Core capital goods shipments were also slightly positive in the past two months.

Oil’s price decline is often blamed as a primary culprit for diminished interest in equipment spending in the first half. Unfortunately, so far in the second half, oil has not been able to mount a sustained rally. Moreover, the oil shock is not the only problem.

Financial market volatility showed up like an uninvited relative in midAugust, and though we wake each morning hoping to see its bags at the door, the volatility endures. Worries about global growth have been a catalyst for some of the market choppiness and those same concerns impact the manufacturing sector as well.

Purchasing managers’ surveys do not offer full-throated endorsement that the recent improvement is sustainable. We learned yesterday that the national ISM manufacturing index for August slumped to its lowest level in two years. Highlighting concerns about the global economy, the export orders component of the ISM slipped further into contraction territory. Regional Fed surveys have been spotty, with the New York Fed’s Empire index falling to levels last seen during the recession while the Philadelphia Fed’s survey showed some improvement in August.

On balance, we think that the worst of the oil-related declines are behind us at this point, which underscores our expectation for slow and steady growth in the manufacturing sector in the second half of the year.