Factory Orders Up 0.6% in May, High Prices May Overstate Spending

Daily Forex Fundamentals | Written by Wachovia Corporation | Jul 02 08 17:11 GMT |

Orders for new goods at U.S. factories climbed 0.6 percent in May. This marks the third consecutive monthly gain, but the increase may have more to do with surging oil prices than a resilient economy. With non-defense capital goods orders ex-aircraft off 0.4 percent, this report does not show signs of strong business investment in Q2.

Prices Underpin Nondurable Orders; Durable Orders Relatively Flat

Petroleum and coal products comprise more than a quarter of all nondurable goods orders. Surging oil prices over the past few months effectively increased the value of orders not only in this category, but also in feed-through areas like chemical products (fertilizer) as well as plastic and rubber products, where natural gas and oil are primary input costs.

Meanwhile durable goods orders were dead-even for the month, suggesting that orders on a volume (rather than price) basis are relatively flat.

With recent price increases, nondurable goods orders have taken the lion's share of the overall factory orders report, eclipsing durable goods which has been the dominant component since the series was first stated on a NAICS basis in 1992.

The point here is that in an environment of rapidly rising prices, an increase in orders can have as much or more to do with higher prices than with an increase in overall demand from businesses. While positive, the factory orders report should not necessarily signal a return of strong growth in business spending.

Non-Defense Capital Goods Orders Ex-Aircraft

Non-defense capital goods orders ex-aircraft remains a good indicator of core business spending. After strong growth in April, there was a bit of a pullback here in May as orders were down 0.4 percent, but that turned out to be less than the 0.8 percent decline initially reported in last week's durable goods report. Businesses are carefully scaling back spending in an economic environment that seems indecisive about its direction.

Given the fact that the ISM purchasing managers' index for manufacturing came in just below the breakeven 50 level in May, this modest decline in non-defense capital goods orders ex-aircraft does not come as a complete surprise.

Earlier this week the ISM reported a number above the breakeven level for the first time since January. This suggests to us that our call for weak business spending in the third quarter is still on track.

This report is just the latest evidence that we are in an environment of painfully slow growth, but growth nonetheless. Like a wrestler that refuses to be pinned, the U.S. economy continues to sidestep the technical definition of a recession while eking out painfully thin economic growth.

Wachovia Corporation
http://www.wachovia.com

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