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Factory Orders Rebound in June Led by Aircraft

New orders for American factories rebounded led by a surge demand for civilian aircraft and a modest gain in consumer goods but as June was the first positive month in three and only the second in the past eleven, it underlined the difficulties facing the manufacturing sector as much signaling momentum.

Factory orders rose 1.8 percent according to the Commerce Department following May’s revised 1.1 percent drop, matching the median forecast in the Bloomberg survey.  Orders in May were originally reported as -1.0 percent.

The jump in factory orders in June was primarily due to a boom in orders for commercial passenger aircraft around the Paris Air Show that month and does not reflect an economy wide revival of consumption.

Boeing Company of Chicago logged 160 new aircraft purchases in June as opposed to just 11 in May.  Orders for transportation equipment overall climbed 9.3 percent in the month. There were also gains in purchases of machinery, electrical devices and appliances and electrical components. 

Outside of the specialty arena of aircraft American factories have been hurt by the strong dollar which inhibits overseas buyers and weak global and domestic demand for durable goods.

Manufacturing accounts for about 12 percent of the U.S GDP but the sector is often used an indicator for the economy as a whole due to the longer lead times needed to increase manufacturing output. 

Factory orders excluding the transportation sector were revised down to 0.5 percent from the initial 0.8 percent reading that had been issued as part of the June durable goods report last week. Also in that July 27th release the results for May were downgraded to -0.3 percent from 0.5 percent. 

Non-defense capital goods orders jumped 9.1 percent in June. But core capital goods, the same category minus civilian aircraft, and an oft cited proxy for business investment known officially as ' capital goods non-defense ex-aircraft’, rose just 0.7 percent in June, and that was a downgrade from the initial 0.9 percent figure. The May result for core capital goods had previously suffered a large negative adjustment to -0.8 percent from 0.4 percent.

So far this year there has been little indication that businesses are ready to invest large sums in new plant and equipment. In the first six months of this year core capital goods have been negative two-thirds of the time and have averaged -0.75 percent each month. 

Shipments of these core capital goods, which are incorporated into the government’s calculation of gross domestic products as business equipment spending, increased 0.3 percent in June. Shipments were previously listed as a 0.1 percent decline. 

That positive revision to core capital goods shipments, combined with a 0.6 percent rise in inventories in June and a upward adjustment in May to 0.1 percent from flat and a report yesterday showing construction spending in May at 1.8 percent rather than 0.8 percent suggests that second-quarter GDP could be revised higher when the government releases its second estimate on August 27th.

The Commerce Department reported last week that the economy expanded at a 2.3 percent annual rate the second quarter.

 

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Bloomberg

factory ord 1aug 4

orders yy july 4

cap goods aug 4

cap goods yy aug 4

 

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