MARKET TRENDS: Factory Orders Slip Against Expectations

New orders for U.S. factory goods slid unexpectedly in April for the eighth time in nine months, with a sharp decrease in demand in the transportation equipment and aircraft. This suggests that the U.S. manufacturers are still battling strong dollar rates and lower business investments in the energy sector, which is struggling with a dip in oil prices. Oil prices surged to over $60 per barrel at the end of April, but have softened a bit. Prices have recovered from the beginning of 2015, when oil prices were below $50 a barrel. A stronger dollar has increased costs for exports, making U.S. manufactured goods less competitive in overseas markets. Exports fell particularly in Europe.

New orders for manufactured goods edged down 0.4% month-over-month (MoM) to $476.7 bn, following a revised 2.2% MoM rise in March, the Commerce Department said on Tuesday. The dip in factory orders was in contrast to the consensus estimate of a 0.2% MoM rise. Factory orders initially grew 2.1% in March. Excluding transportation, factory orders remained flat.

A larger decline of 1% MoM for orders related to durable goods, which include items that can be used for three years or more, in April offsets a 0.2% MoM fall in demand for non-durable goods, which include food and clothing. Although industrial machinery demand gained 29.2% MoM, it was primarily offset by a sharp decline in the aircraft category. Defence, as well as non-defence, search and navigation equipment demand fell 11.8% and 14.6%, respectively, while defence aircrafts and parts orders shrunk 11.4% MoM. Non-military capital goods, excluding aircraft, a measure of business confidence and spending plans, fell 0.3%. Electronic goods orders declined 4%.

A slowdown in manufacturing activities and lower factory orders could further worsen a negative gross domestic growth rate. However, an increase in May’s ISM manufacturing Index from a government release on Monday, raises hopes. New orders and better employment levels triggered the increase in the ISM Index, which climbed 1.3 points to 52.8 in May from April’s reading of 51.5, indicating expansion in manufacturing activities. The west coast supply disruptions have been resolved and there is a smooth flow of goods at the ports. Apart from energy, business investments in other sectors have improved. In a separate report by the auto industry on Tuesday, auto sales have surged higher in May at the fastest rate in almost 10 years.