Rising Orders Show U.S. Manufacturing Continues to Heal

The U.S. got more good news on Tuesday regarding its manufacturing sector. The U.S. Commerce Department reported that its factory orders index rose 1.1% in November -- the seventh increase in eight months. A Bloomberg News economists survey had expected November factory orders to increase 0.4%, after an 0.8% rise in October and a 1.6% jump in September.%%DynaPub-Enhancement class="enhancement contentType-HTML Content fragmentId-1 payloadId-61603 alignment-right size-small"%%What's more -- excluding the often-volatile transportation component (which includes airplanes and cars) -- factory orders increased 1.9% in November after increasing a revised 1% in October, up from the original report of a 0.5% rise. Excluding defense, factory orders rose 1.1% in November, after increasing 1.5% in October.

The November factory order breakdown largely shows a broad-based recovery: Machinery orders rose 3.3%; computers and electronic products increased 4.9%; primary metals rose 1.4%; appliances and electrical components (excluding computers), increased 3.1%; fabricated products rose 0.9%; and furniture orders increased 0.6%. However, transportation equipment orders fell 5.8%.

Rising Inventories Could Signal Rising Optimism

Also in November, inventories increased for the second straight month, rising 0.2%, after increasing 0.6% in October. Prior to October, inventories had declined for 13 consecutive months.

Economists caution that two months' data aren't nearly enough to project a trend, but if inventories continue to increase, that suggests businesses are becoming more confident about holding extra goods/products in expectation of rising sales. That would be a reversal from the inventory-paring that businesses embarked on during the recession on fears of holding products they couldn't sell. If both the factory order and inventory metrics continue to rise, that will provide a tailwind for U.S. GDP in first- and second-quarter 2010, as it no-doubt did in fourth-quarter 2009.

Economists follow the factory orders statistic because it provides one of the most comprehensive surveys of advance orders for durable goods and reveals 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 not to put too much emphasis on the initially released monthly stat because it's typically revised in subsequent monthly reports as more-complete data become available.

Indeed, keeping factory and inventory data in perspective is key. While uptrends in each boost GDP in the short term, long-term, organic demand must also increase. Otherwise, economic growth will slow when manufacturers trim production after inventories have been replenished to sufficient levels. What's the key to organic demand? Job growth, with an increase in household formation. Each must steadily increase to sustain U.S. GDP growth in the years ahead.
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