Factory Orders Show Strength

Friday's factory orders report, up 1.4 percent in September following a 1.2 percent rise in August, closes the book on what was a second straight strong month for manufacturing. The split between the report's two main components shows a 0.8 percent September rise for nondurable goods -- the new data in today's report where strength is tied to petroleum and coal -- and a 2.0 percent jump for durable orders vs 2.2 percent in last week's advance report for this component.

The key to this report is core capital goods (nondefense ex-aircraft). This is a central reading for business investment and the gains are very impressive: up 1.7 percent in September for orders which is 4 tenths higher than the advance reading with August revised 1 tenth higher to 1.4 percent. The gain in July stands at 1.3 percent. Also revised higher are shipments of core capital goods, up 0.9 percent in September following two prior gains of 1.3 and 1.0 percent.

The gains for core capital goods shipments are a boost for GDP as is a general inventory build underway, up 0.7 percent and 0.6 percent in the last two months. This build is very positive as manufacturers try to keep up with demand. The inventory-to-shipments ratio is unchanged at a very constructive 1.38. Other readings include a 0.8 percent rise for total shipments with unfilled orders showing less life, up only 0.2 percent. Given the strength in new orders, unfilled orders may soon be accumulating at a faster rate.

Gains in September and August do reflect extending strength for commercial aircraft orders which are always bumpy and may understandably ease in the months ahead. But the fundamentals for the factory sector, highlighted by capital goods, are very positive. And the one positive for the sector that has yet to appear, and that's production volumes in the Federal Reserve's industrial production report, look to bounce solidly higher based on hours data in this morning's employment report.

Recent History Of This Indicator:
Momentum has been emerging in factory orders and a breakout is possible for September. The durables side of the report is guaranteed to be strong given the 2.2 percent surge in the prior week's advance reading. Growth for non-durables is not expected to be quite as strong, pulling back the factory orders consensus to a gain of 1.2 percent. Year-on-year rates in this report are likely to move up a notch to the mid-single digits.