U.S. Factory Orders Fall More Than Expected
New orders at U.S. factories fell more than expected in May. This is causing concern over the strength of the manufacturing sector, since manufacturing is responsible for around 12% of the U.S. economy.
According to the U.S. Census Bureau, U.S. factory orders fell by a seasonally adjusted 0.8% in May to $464.86 billion. This represents the biggest decline since November 2016. Analysts were expecting U.S. factory orders to only fall 0.5%.1
This is the second consecutive month that U.S. factory orders have declined. In April, U.S. factory orders were revised down to 0.3% from an initial estimate of a 0.2% decrease.
In May 2017, new orders for durable goods (takes many years to wear out, like cars, electronics, appliances, furniture, jewelry, sports equipment etc.) fell 0.8%. This followed a 0.8% decrease in April.
New orders for nondurable goods (goods that are consumed immediately or within a short time like fuel, food, and clothing) decreased $1.8 billion or 0.8% to $235.7 billion. Excluding defense, new U.S. factory orders tumbled 0.5%.
This is a reversal for U.S. factory orders. Thanks to a slight recovery in the energy sector, manufacturing was on the upswing in 2015 and 2016. This resulted in increased demand for oil and drilling equipment.
The optimism at U.S. factories was short lived. Manufacturing has slowed on the heels of slumping oil prices and tumbling motor vehicle sales.
In June, U.S. auto sales fell for the fourth consecutive month. Meanwhile, oil prices continue to slide after cash-strapped OPEC announced June exports increased and Russia said it would not cut its oil production.
U.S. factory orders are also being hindered by a strong U.S dollar which makes American products more expensive overseas.
The U.S. Economy Weakens
Not surprisingly, broader U.S. economic growth has been weak. In 2016, U.S. GDP was just 1.6%, tied for the worst reading since 2011. In the first quarter, U.S. GDP advanced just 1.4%. The International Monetary Fund recently lowered its outlook for the U.S. economy in 2017, cutting its GDP forecast to 2.1% from 2.3%.2
The weaker than expected U.S. factory orders also suggest second quarter GDP results will be underwhelming too. Not everyone is in agreement though. The Atlanta Fed expects second quarter 2017 GDP to increase 3.0%, up from a 2.7% projection at the end of June.3
Meanwhile, the usually optimistic New York Federal Reserve expects second quarter GDP to come in at 1.9% and third quarter U.S. GDP of slip to 1.6%.4
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- “Monthly Full Report on Manufacturers’ Shipments, Inventories, and Orders May 2017,” U.S. Census Bureau, July 5, 2017; https://www.census.gov/manufacturing/m3/prel/pdf/s-i-o.pdf.
- “IMF Cuts U.S. Outlook, Calls Trump’s Growth Target Unlikely,” Bloomberg.com, June 27, 2017; https://www.bloomberg.com/news/articles/2017-06-27/imf-cuts-u-s-outlook-calls-trump-s-growth-target-unrealistic.
- GDPNow,” Federal Reserve Bank of Atlanta, July 7, 2017; https://www.frbatlanta.org/cqer/research/gdpnow.aspx?panel=1.
- “Nowcasting Report,” Federal Reserve Bank of New York, July 7, 2017; https://www.newyorkfed.org/research/policy/nowcast
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