Despite Headlines, Factory Orders Show Strength

A lower-than-expected headline gain of 0.4 percent in July reflects price-related weakness in energy products and masks significant underlying strength in factory orders. Pulled down by petroleum and coal products, orders for non-durables fell a sharp 1.3 percent, offsetting a very strong and upward revised jump of 2.2 percent in durable goods orders (initially plus 2.0 percent as posted in last week's advance durable goods report). The gain in durable goods was driven by gains in motor vehicles and includes strong gains for capital goods which indicate, at least it did as of July, rising business investment and rising confidence in the overall outlook.

Orders for vehicle bodies, parts & trailers jumped 4.0 percent in July after rising 1.2 percent in June. Orders for ships & boats have been on a special tear, up 19.5 percent following gains of 28.0 and 11.0 percent in the two prior reports. And the July report would have been even stronger if not for a 6.1 percent downswing in commercial aircraft orders that followed June's 70 percent surge. Excluding transportation equipment, factory orders actually fell in July, down 0.6 percent following a 0.6 percent rise in June.

Turning to details on capital goods, core orders, that is nondefense goods excluding aircraft, jumped 2.1 percent on top of June's 1.5 percent gain. Shipments for this reading, which are part of nonresidential fixed investment in the GDP report, rose 0.6 percent in July and 1.0 percent in June. Note that the 0.6 percent gain July is unrevised which should not affect ongoing third-quarter GDP estimates.

Total shipments, again reflecting weakness in non-durables, slipped 0.2 percent in July. Unfilled orders rose 0.2 percent with inventories slipping 0.1 percent. The slip in inventories did not change the inventory-to-shipments ratio which is stable at 1.35.

Global volatility is a negative that hit in August and that may or may not weigh on the nation's factory sector which, in the strength of the auto sector, enjoyed strong domestic-based demand in June and July. And given the strength of yesterday's motor vehicle sales, the factory sector looks to get a continuing boost from the auto sector.

Recent History Of This Indicator:
Factory orders are expected to rise a very strong 0.9 percent in July on top of June's 1.8 percent surge. Both motor vehicles and commercial aircraft are centers of strength for the sector, with early signs of momentum for capital goods another positive.