May's Drop in Factory Orders Adds to the Slowdown Scenario

U.S. manufacturingFactory orders unexpectedly fell 1.4%, the U.S. Commerce Department announced Friday -- the largest decline since March 2009 -- and one that provides additional evidence that the U.S. expansion is slowing. A Bloomberg survey had expected the figure to fall 0.5% after a 1% gain in April, which was revised down from the previously released 1.2% gain. Factory orders rose 1.7% in March.

Equally significant, excluding the often-volatile transportation component (which includes airplanes and cars), factory orders fell 0.6% in May after an 0.7% decline in April and a 3.8% gain in March.

Excluding defense, factory orders fell 1.4% in May, after gains of 1.1% and 1.7% in April and March, respectively. And durable goods orders fell 0.6% in May, after gains of 2.9% and 0.1% in April and March, respectively.

Transportation Equipment Orders Plunge

Here's the May factory order breakdown by category: Machinery orders surged 9.3%, furniture orders rose 2.3%, primary metals orders increased 0.6%, and computers/electronic products rose 0.5%. On the downside, transportation equipment plunged 6.9%, nondurable goods orders fell 2.1%, fabricated metal products orders fell 0.9%, and electric equipment/appliances (excluding computers) declined 0.4%.

Economists follow the factory orders statistic because it provides one of the most comprehensive surveys of advance orders for durable goods. It's a barometer of 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.

A Cooling Economy?

May's report caps a difficult two-week period for the U.S. economy. Recent data for job creation, jobless claims, and home sales suggest that domestic growth is slowing. If manufacturing activity -- which to-date has led the expansion -- enters a downtrend, that almost guarantees a cooler economy at a time when strong GDP growth is needed to create the hundreds of thousands of new jobs per month to lower the U.S.'s high unemployment rate, now 9.5%.

That's why the large May factory order decline is a concern. But investors shouldn't immediately conclude that the factory growth has shifted in to reverse, for two reasons.

First, some pause was expected, given the impressive recovery in factory orders over the past year.

Second, like all initial estimates, the Commerce Department's May statistic is subject to revisions as more data becomes available. In recent expansions, more than one negative stat has been revised to a positive one in subsequent months.
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