Looking past volatility in many readings, factory growth is steady at a moderate pace. New orders rose 2.1 percent in May following a revised 1.3 percent rise in April. But commercial aircraft orders, which are always volatile month-to-month, are skewing the results higher. Excluding transportation equipment, new orders rose 0.6 percent in May, which is very respectable, following a 0.2 percent gain in April. A back-to-back gain isn't that common right now for the manufacturing sector even though this modest back-to-back gain for ex-transportation follows a 2.8 percent plunge in March.
One area of softness, at least for May, is new orders for autos which, despite strong underlying sales, fell 2.0 percent. The drop does follow a 4.1 percent surge in April. Auto orders make up about 4 percent of all orders as do orders for commercial aircraft which surged 51 percent in May following an 18 percent surge in April and a 43 percent plunge in March. Talk about monthly volatility!
Shipments, where activity has also been uneven, rose 1.0 percent in May but follow declines in the prior two months of 0.7 percent and 1.5 percent. Shipments of non-defense capital goods excluding aircraft, which is a reading used to gauge business expansion, nearly reversed a 2.1 percent April decline with a 1.9 percent gain in May.
On the plus side is a 0.8 percent rise in unfilled orders and a no change reading for inventories which have been dead flat. Note that the need to replenish low inventories is a plus for the employment outlook.
Manufacturers have been saying all along that growth in the first half of the year would be slow before picking up in the second half, an outlook, when putting all the volatility aside, that may be playing out. The Dow is moving to opening highs following today's report.
Market Consensus before announcement
Factory orders in April rebounded 1.0 percent but followed a revised 4.7 percent decline in March. When stripping out transportation, which includes the volatile aerospace component, new orders slipped 0.1 percent and underscored the flat conditions. Positives in the report included strong order gains for capital goods categories. Total unfilled orders were also a positive, up 0.3 percent but following a 0.6 percent decline in the prior month. More recently, new factory orders for durables in May jumped 3.6 percent, following a matching 3.6 percent spike the month before. The transportation component surged 10.2 percent (largely aircraft) after an 8.3 percent boost in April. Outside of transportation, component strength for durables in May was mostly broad based.