How Factory Orders Work

A factory order report is a great economic indicator of the industry demand for durable and non-durable goods reported by domestic factories. The report includes information such as new orders, unfulfilled orders, shipments, and inventory. The United States Census Bureau published factory orders monthly. The report's full title is the "Full Report on Manufacturers' Shipments, Inventories, and Orders (M3)"—but the layperson refers to them as factory orders reports.

The report consists of four sections:

  1. New Orders: this section contains all new orders and shows if their demand is increasing or decreasing.
  2. Unfulfilled Orders: this section contains a backlog in production.
  3. Shipments: includes all current sales.
  4. Inventories: shows the strength of the current and future production.

Data in factory orders are outlined in billions of dollars and as a percentage change from the previous month.

Factory orders contain two separate indicators: durable and non-durable goods orders. Durable goods are products with an expected life span of three years. They often refer to goods not purchased regularly, such as lawn and garden equipment, furniture, appliances, electronics, and motor vehicle. The durable goods section is a closely watched measure of economic activity because they are the first to get affected when there's an economic upturn or downturn. In contrast, non-durable goods include items with high purchase frequency such as food, clothing, medication, cleaning supply, footwear, and cosmetics.

Real World Example of Factory Orders

Factory orders can help you to determine when the economy is growing. We can see this in the factory report released on March 4, 2021. The report recorded a 2.6% increase from January on orders for transportation equipment. New orders excluding transportation equipment also increased by a respectable 1.7%, though it was 0.2% lower than the previous month.

A decrease in factory orders can signal an economic downturn which majorly affects the demand for durable goods. A real-world example is the factory orders report published on the same date, different year: March 4, 2020. The closure of nonessential business due to the COVID-19 pandemic disrupted supply chains globally and edged the global economy into recession. Factory orders suffered a 10.3% drop from the previous month as demand for durable goods decline.

Companies like Boeing shut down their Boeing 737 MAX air carriers' production as the transportation industry around the world shut down due to travel restrictions.

Significance of Factory Orders

Because the durable goods report contains orders for capital goods and gets released a couple of weeks earlier, data in factory orders is relatively predictable. The only new data reported is that of the non-durable component. Factory orders are usually not a market mover, but it can draw attention when its report includes revised durable goods orders.

Since the investment market's performance relies heavily on the overall economy, investors acknowledge the need to monitor economic indicators to gain insight into growth trends. An increase in factory orders indicates a healthy economy as it means that consumer demand is on the rise, and they are willing to make purchases. As such, factory orders are good economic indicators.