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Factory Orders Report: An Overview on Reading it

Release Date: first week of the month
(For Factory Orders report)

Many beginners in the financial markets suffer some confusion as to the names and content of the “Factory Orders” and “Durable Goods” reports. Both of these reports appear on the same web page published by the United States Census Bureau. This page is entitled, “Manufacturers’ Shipments, Inventories, and Orders.” That is also the name of what most of us call the “Factory Orders” report, the text of which appears on this web page under the heading “Full Report Highlights.”

Under a heading just above this one, entitled “Advance Report Highlights,” is the “Advance Report on Durable Goods Manufacture’s Shipments, Inventories and Orders,” which is the report that most of us call the “Durable Goods” report.

This Factory Orders report comes out the first week of every month and covers data from two calendar months previous. A week or so before this, the Census Bureau puts out its Durable Goods report, which is actually an “Advance” report containing an abbreviated snapshot of the durable goods portion of the “Factory Orders.” Shorter term investors prefer to follow the Durable Goods report because it comes out a week to ten days earlier.

Also, they know that historically the Durable Goods data has a great record for calling short to intermediate term turns in the economy. The subsequent Factory Orders report includes everything in the Durable Goods report, as well as updated and revised Durable Goods data, and a whole range of other finely detailed information about nondurable goods. This information is often quite useful, especially for those involved in individual stock or sector analysis.

This is how the headline Factory Orders numbers appeared to many on July 2, 2015: 

M/M changePreviousPrevious Rev.ConsensusActual
Factory Orders -0.4 % -0.7 % -0.4 % -1.0 %

These numbers are greatly skewed by the durable goods element, which over the course of the previous week, was revised lower from negative 1.8% to negative 2.2%. Aerospace, energy equipment, and autos (the latter of which until now has been strong this year) all conspired to bring these numbers down.

The final “Full Report” for Factory Orders contains sections on “New Orders,” “Shipments,” “Unfilled Orders,” and “Inventories.” For each of these sections there is an Excel page with columns of data from recent months.

Most of the recent data, including the data in the July 2, 2015 report, has been unremittingly dour. New orders for manufactured goods were down nine of the last ten months. Unfilled orders have been down five of the last six months. These drops have been small in the last two months (0.5% and 0.2% respectively).

However, these unfilled order numbers on the whole bode ill for manufacturing employment prospects in the near and intermediate future. See charts below for year-over-year changes in factory orders data. The grim statistics extend back all the way to 2007. The upbeat figures we see in 2009 and 2010 are part of the snap back we experienced after a period in 2008 when manufacturing in the U.S. was nearly frozen.

To be sure, there was a brief period in the summer of 2014 when factory orders spiked as both aerospace and autos both simultaneously enjoyed a brief cyclic mini-surge. Aside from these few weeks though, factory orders have been plodding ever lower. It is noteworthy that in the summer of 2015 the economy and the financial markets have not been mirroring this downturn.

The economy was generating record numbers of jobs, the unemployment level was at 5.3%, and although a strong dollar is repressing profits, the U.S. large cap companies were productive and equities markets were inching upwards. Why the disconnect?

Peter Kelly, one of the top soybean traders at the Chicago Board of Trade, once said, “If you can reconcile contradictory indicators, you can often wind up understanding the unique place we are in the market at any given time.” So, how can we simultaneously have a robust labor market and okay equities markets, while factory orders are moribund?

Clearly orders for manufacturing firms are not the timely leading indicator they have been in the past. Part of the explanation is that the stronger dollar mars the manufacturing sector in two ways: U.S. merchants can get cheaper products to sell from overseas; and U.S. exporters have trouble selling expensive manufactured goods overseas.

Next, recent jobs tend to be lower paying, so machinery makers have a reduced market for workplace labor saving devices.

Finally, it seems very likely that the U.S. is continuing its march toward an ever more service based economy. This trend began at least as far back as the eighties and it shows no sign of abating. In theory, we can be just as productive and wealthy as any manufacturing based economy. This has yet to be demonstrated though.

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