Factory orders data suggest a brighter third quarter

Wednesday, September 3, 2008

Today, the Census Bureau released its July report on factory orders, durable and non-durable goods:

- New orders for manufactured goods were up for five consecutive months, increasing $5.9 billion or 1.3 percent in July.
- Shipments of goods was up six of the last seven months, increasing $9.4 billion or 2.1 percent to $465.3 billion in July.
- Inventories were up ten of the last eleven months, increasing $2.6 billion or 0.5 percent to $558.2 billion.
- The inventories-to-shipments ratio was 1.20, down from 1.22 in June.

The report beat consensus “guesstimates,” and initially stocks traded up on the good news. From an economic standpoint, the report indicates that export growth will continue to support US GDP (Gross Domestic Product, a measure of total economic production), giving the broken housing and labor markets more time to heal. Further, the report indicates that a further boost may come from inventory accumulation in Q3.

On a monthly basis, inventory growth has been outpacing sales growth since March. Manufacturing firms expected slower sales growth and have been drawing on inventories to supply strong demand. Going forward, it is probable that manufacturing firms will replenish their inventory stocks, boosting GDP since inventory accumulation adds to measured GDP.

While inventories subtracted 1.44% from GDP growth in Q2, this data suggest that inventories will add to Q3 GDP growth. Current estimates for Q3 GDP growth range from 0.7% (Deutsche Bank, very pessimistic) to 2.0% (Macroeconomic Advisers and Action Economics, professional forecasting firms). Today’s data was very good and will likely support the 1.5%-2.0% range.

Rebecca Wilder


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