U.S. factory orders rise unexpectedly in October

It was a pretty strong week for the U.S. economy: The manufacturing sector continued to expand, the Dow solidified gains above 10,000, and the nation lost only 11,000 jobs in November. To this the U.S. Commerce Department added more good news Friday: Factory orders unexpectedly increased 0.6% in October.

A Bloomberg News survey had expected October factory orders to rise 0.2%. Factory orders increased a revised 1.6% in September, higher than the previously released 0.9% gain for September. Factory orders fell 0.8% in August.

Further, excluding the often-volatile transportation component (which includes airplanes and cars), factory orders increased 0.5% in October after a 1.5% rise in September and a 0.3% increase in August. Excluding defense, factory orders rose 1.1% in October, after a 1.5% rise in September and 0.7% decline in August.

Inventories Rise for First Time in a Year

Also in October, inventories increased 0.4% -- ending a 13-month decline in that category. Economists caution that one month's data are not nearly enough to project a trend, but if inventories continue to increase, that would suggest businesses are becoming more confident about holding extra goods and products in expectation of rising sales.

Here's the October factory order breakdown, by category: primary metals, up 4.3%; appliances and electrical components (excluding computers), up 2.7%; transportation equipment, up 1.6%; furniture and related products, up 0.1%; nonmetallic mineral products, down 2.5%; machinery, down 8.5%; and computers, down 2.4%.

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 release of this stat because the total is typically revised in subsequent monthly reports as more-complete data becomes available to the government.

Two Forces for the Good, Mostly

Another solid increase in U.S. factory orders in October indicates a continuing positive trend: Companies and vendors have experienced and continue to see a modest increase in demand in the economy, prompting them to increase orders. The manufacturing sector is rebounding, and the U.S. economy is recovering.

Also, when one combines the increase in demand with depleted inventories (and the need to rebuild them), that creates two factors that, at least historically, have led to a sustainable recovery. Further, given the low capacity utilization rate, this suggests that U.S. factories and businesses can increase output to meet the increased commercial activity with current production methods. That's good news for corporate revenue and earnings. The downside is that job creation and hiring will be less strong than it would be during a typical economic recovery.

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