Factory Orders Continue to Strengthen

Factory orders posted a strong rebound as orders increased 0.9% in September after declining 0.8% in August.

The drop in August was mostly due a one-time binge in aircraft orders in July and does not represent the short-term trend. In fact, excluding transportation, orders posted a small 0.3% increase in August. The gains carried over into September, where factory orders excluding transportation grew 0.8%.

Defense spending only provided 0.2 percentage points of growth to total orders.

Unlike last month, the data looks extremely promising for the manufacturing sector.

The advance estimate for durable goods orders proved to be too low as orders grew 1.4% instead of 1.0%.

A large chunk of the lowball estimate was due to a poor initial reading of motor vehicle and parts orders. It was originally projected that new orders declined 0.1% in August. Anecdotal evidence suggested that dealer inventories were at historic lows after the sell-off in August from the Cash for Clunkers program. The advance reading suggested that dealers were not reordering cars as they waited to make sure demand was going to stabilize. This turned out not to be true. Orders for new motor vehicles and parts grew at a healthy 0.6% and signal a strengthening in the near term outlook of car dealers.

Nondurable goods industry orders increased 0.6% in September after growing 0.9% in August. The data isn't broken down by industry, so it is not possible to determine where the growth occurred.

Business investment looks healthy and a rebound seems likely. Many firms announced during their earnings reports that they were on the verge of reinvesting in equipment and software to take advantage of the low interest rates and better sales outlook.

Evidence in August and July seemed to show a drop in investment, but orders for nondefense capital goods excluding aircraft surged 1.8% in September. While the gain is slightly less than originally predicted in the advance report (2.0%), the positive growth will still be looked upon as a strengthening of the sector.

However, orders typically have a month or so delay before shipment, and investment in equipment and software for Q3 GDP will probably be revised down. Shipments of nondefense capital goods excluding aircraft declined (-0.2%) for the third consecutive month.

Manufacturing shipments increased 0.8% as durable goods shipments rose 1.1% and nondurable goods increased 0.6% in September.

Just about all of the increase in durable goods shipments was in the transportation sector as motor vehicle and parts shipments increased 1.0%. Excluding transportation, shipments only increased 0.1%.

Manufacturing inventories declined for the 13th consecutive month and the inventory restocking cycle still seems well off in the distance. GDP in Q3 saw a positive contribution from inventories, but that was mainly due to a lessening of the inventory decline rather than growth in demand from wholesalers and retailers.

Durable and nondurable goods inventories declined 1.0% and 0.9% respectively. The inventory-to-shipments ratio declined to 1.36 from 1.38.