Headline total factory orders were below expectations, increasing 1.6% in January. On a three-month moving average basis, orders are now 0.6% lower, after a 0.7% fall in December. Meanwhile, orders excluding transportation fell by 0.2%. Excluding defence, orders were 1.3% higher, following a 1.8% fall. Nondefence capital goods orders excluding aircraft and parts (the favoured proxy for business investment) regained ground, rising by 3.4%, after a 3.5% fall in December; these orders were 4.9% lower than one year ago.
Inventories fell for the seventh consecutive month, down 0.4%. They were also, helpfully, lower against shipments, which rose by 0.3%. The result is that the inventory-to-shipments ratio, which is still far above the level most manufacturers would be comfortable with, dipped slightly in the month. Unfilled orders were 0.1% higher. There continue to be large swings in transportation orders; civilian aircraft orders jumped by 54.4% in the month (following a 29.3% fall), while defence aircraft and parts rose 85.2% (following a 66.8% fall). The largest increase, however, came from mining, oil field, and gas field machinery orders, which rose by 365.7% following a 76.6% fall.
This month’s report was indicative of the headwinds that the industrial sector continues to face, including the stronger dollar, weak global demand, very low commodity prices, high inventories, and tightening credit conditions. Furthermore, if company earnings reports are anything to go by, these factors are likely to remain a drag for a while yet. In terms of the annual rate of change, this year’s unseasonably warm weather relative to the unseasonally cold weather in both 2014 and 2015 (as well as dockworkers’ strike in 2015), should make for easier comparisons; however, the data will not have also been heavily skewed upward by the seasonal adjustment factors. It is worth noting that according to the Census Bureau, 2015 does not yet feature in the seasonal adjustment factors; the year’s data will not be included until May when the annual revisions are carried out. Furthermore, they noted that the adjustments made last year to include 2014’s wild weather were actually relatively small. The bottom line here is that with growth in many of the commodity producing countries still under immense pressure, there still seems to be only limited upside room for industrial activity and commodity prices, even though we are finally starting to see some signs of stability domestically.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.