Factory orders surge higher in June

The factory sector surged higher in June following a weak May with new orders up a much higher-than-expected 1.1 percent following a downward revised 0.6 percent decline in May. The durable goods component, previously released, is revised sharply higher to show a 1.7 percent jump, up from an initial reading of plus 0.7 percent. The component for non-durable goods, the new reading in today's report, also shows strength, up a solid 0.6 percent following a 0.2 percent decline in May.

The outstanding area of strength in the report is core capital goods where a big 3.3 percent jump for nondefense capital goods excluding aircraft points to solid business investment which reflects solid business confidence in the long term outlook. But strength isn't isolated to this reading as new orders show wide gains including for machinery (again tied to capital goods), aircraft, computers, and electrical equipment. Orders for motor vehicles, in an isolated negative, were flat in the month. The gain for non-durable goods is tied to strength for petroleum and coal demand.

Other readings are likewise strong including a 0.5 percent rise for shipments that, however, includes a 0.3 percent dip for shipments of core capital goods that were also soft in May (plus 0.1 percent) and April (minus 0.3 percent) in readings that may soften the outlook for the first revision in second-quarter GDP. Still, orders for core capital goods point to rising shipments ahead. A major point of strength is a 1.0 percent jump in total backlog orders, a gain that helps explain the jump in core capital goods orders, and a modest 0.3 percent rise in total inventories which points to the need for restocking ahead.

Month-to-month readings can be bumpy in the factory sector, but this is a very balanced and very solid report that confirms manufacturing as the economy's leading sector.