US Factory Orders to Pull Back from 7-Month High

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US factory orders are forecast to fall by more than half after rising strongly in March.

Data from the US Commerce Department is expected to show a 1.0% decline on a month over month basis in April.

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Capturing the overall health of the manufacturing sector, economists forecast that activity could slow. Factory orders fell sharply in December 2018. After declining 2.1%, they have since started to rise steadily.

U.S. Factory Orders, March 2019
US Factory Orders, March 2019

The gradual pick up in factory orders was consistent with Q1 growth.

In March 2019, factory orders rose 1.9% on the month. This was the biggest increase in over seven months. On a year over year basis, factory orders were up 1.7%.

There was a strong demand for transportation equipment alongside computer and electronic equipment.

February’s data was also revised upwards to show just a 0.3% decline instead of the 0.5% decline from the initial report. March’s factory orders were forecast to rise by 1.5%. The inventories rose 0.4% on the month. But, on the flip side, the number of unsold goods kept increasing, according to reports.

The number of orders that were unfilled rose by 0.2%. The increase in the unsold stock remains a concern, however.

Manufacturing Activity Weak in April

ISM’s manufacturing PMI saw a subdued print in April. Manufacturing activity as measured by the Institute of Supply Management fell to a two and a half year low. The manufacturing index registered a reading of 52.8 in April.

This was after manufacturing activity rose to 55.3 in the month before. Production, new orders, and employment indexes fell during the month. The backlog of orders grew strongly, being the only data set to register an increase.

Still, an increase in the backlog of orders does not translate to higher activity. US firms are already facing a shortage of skills leading to the firms being unable to fulfill the orders.

Today’s factory orders report will no doubt impact the forecasts for the second quarter growth. Investors and economists alike anticipate growth in the US to slow significantly. This comes as the US economy grew strongly in the first quarter of the year. But doubts remain on whether the pace of growth will be sustainable.

Growth in the second quarter is forecast to rise just under 2% on a quarterly basis. This marks a solid retreat from the 3.1% growth rate in Q1.

Business activity could moderate further, leading to slower pace of growth in factory orders. Business spending already fell quite a bit during the first quarter and could see this trend move into the second quarter of the year.

Furthermore, the ongoing trade war narrative also remains a big concern. There is evidence building up pointing to a slowdown, both in the United States and China.

Durable Goods Orders Decline

During the reporting month of April, the markets were generally optimistic. This was due to the sentiment that the US and China would agree to a trade deal soon. As a result, factory orders could potentially see a slower than forecast decline.

The durable goods orders report which came out a week ago showed the biggest drop in four months in April. Non-military capital goods excluding aircraft fell 0.9% from the previous month.

Meanwhile, a broader measure of durable goods orders that last at least three years fell 2.1% on the month. The durable goods report covering the month of April comes before Trump’s decision to slap China with higher tariffs.

However, despite the optimism that prevailed earlier, the chances of factory orders to rise during the month remain slim.

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