Not So Fabulous Factory Orders

Includes: BA, CAT, DE, F, GE, GM
by: Markos Kaminis

The market grew enthusiastic Wednesday on Factory Order growth that exceeded economists’ views. That’s because any news that contradicts with data showing softness in manufacturing, consumer mood or any other recently questionable economic measure offers hope. However, closer inspection of the data and a minute of critical thought should lead to the determination that this factory order report is not so fabulous.

Factory Orders rose 2.4% in July, ahead of economists’ views for 2.0% growth, giving life to stocks Wednesday. July’s growth offered hope in the place of the concern brought on by June’s revised order decline of 0.4% (revised from -0.8%). It also offered respite from the general worry brewed up by the recent Philly Fed Survey alarm, which exacerbated manufacturing sector concern.

However, July’s Factory Order growth will not perfectly relieve market pressures. It was, after all, mostly on high ticket transportation orders. Excluding transportation, new orders increased just 0.9%. Transportation equipment orders were up 14.8%, and durable goods orders rose 4.1%. This is good news of course, but it is important to note that nondurable goods orders were up 1.0% and that we are talking about July. More recent data, including the Philly Fed and ISM data, seem to indicate August may have been significantly less enthusing, if not downright depressing.

As I surveyed the list of industries reported upon individually, I noted many percentage changes with minus signs before them. For example, while primary metal goods orders were up 9.9%, machinery orders were down 0.2% and industrial machinery was short 13.8%. Where non-defense aircraft and parts orders were up 43.4%, computer and electronic products orders were off 3.4%. Electrical equipment, appliances and components orders fell by 2.3% and furniture and related products orders were flat. It’s possible that demand from Japan, driven by its rebuilding effort post its catastrophic earthquake, helped to lift some categories while others languished.

The Chicago Purchasing Managers Index was also reported Wednesday, and its Business Barometer Index deteriorated to a mark of 56.5, from July’s 58.8 level. This survey measures all business in the Chicago region, and a mark above 50 signifies there is regional strength in the Midwest. Perhaps this is the result of emerging market demand for autos and other goods manufactured in the U.S. In any event, it’s clear that the Midwest is holding up better than the East Coast now.

The Factory Orders data showed that inventory continues to build. In fact, inventory of manufactured durable goods was up nineteen consecutive months, and is currently at its highest level since the series was first published on a NAICS basis in 1992. Even while inventories were higher though, the inventory-to-shipments ratio improved to 1.32, from 1.33 in June. So premature inventory build would not seem to be a major problem, unless orders are cancelled.

While the market celebrates what’s worth a cheer, I cannot help but advise readers to note the divergence between industries illustrated within the report. Also, given that since July, consumer confidence has deteriorated further and faith in the American economy has been shaken, we cannot necessarily party heartily before August and September’s results are shown. I have concern that an eventual loss of the temporary boost from Japanese rebuilding demands and also slowing emerging market demand for goods globally, which have been supports against a suspect American recovery, threaten to alter the trend in factory order growth in the months ahead. Indeed, I beckon you to beware that recession is a significant threat, and advise that I find this latest factory order data less than fabulous.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.