Factory orders fall for first time in five months

Two tough reports for the U.S. economy and stock market were released on Friday: September saw the loss of 263,000 jobs, far worse than expected, and factory orders decreased 0.8 percent in August, the U.S. Commerce Department announced. It was the first factory orders decline in five months.

Economists surveyed by Bloomberg News had expected August factory orders to rise 1.0 percent. Factory orders rose a revised 1.4 percent in July.

There was one bright spot, however: excluding the often-volatile transportation component (which includes airplanes and cars), factory orders increased 0.4 percent in August. The ex-transportation index increased 0.3 percent in July.

In August, new orders for manufactured durable goods decreased 2.6 percent, while new orders for manufactured non-durable goods rose 0.8 percent; unfilled orders declined 0.4 percent.

Factories still paring inventories

Meanwhile, inventories decreased 0.8 percent -- the 12th consecutive monthly reduction in inventories. Shipments fell 0.3 percent.

Further, with inventories falling faster than shipments, the inventory-to-shipments ratio continues to decline, falling to 1.38 in August from 1.39 in July.

Economists follow the factory orders statistic because it provides one of the most comprehensive surveys of advance orders for durable goods -- how busy factories are likely to be in the period ahead. Factory orders also are a major value-added component of the U.S. economy.

However, economists also caution investors to not put too much emphasis on the initial released factory orders monthly statistic, as the total is typically revised in subsequent monthly reports, as more-complete data becomes available to the Commerce Department.

Economic Analysis: It was a mildly disappointing August factory orders statistic, but one that investors can overlook, as the more-telling ex-transportation component (excluding airplane and vehicle orders) actually rose 0.4 percent. The ex-transportation increase points to continued rising demand. Further, factories continue to trim inventories -- which means a re-stocking effort will boost U.S. GDP in the quarters ahead, assuming rising demand continues, and the recovery ensues. However, if factory orders decline in subsequent months, that would be a sign that demand is weakening -- a warning sign of a potential economic retrenchment or double-dip recession.

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