WHAT IS Factory Orders
Factory orders are economic indicators of the dollar value for goods from factories. Factory orders represent both durable and non-durable goods.
BREAKING DOWN Factory Orders
Factory orders are released monthly in a report by the the Census Bureau of the U.S. Department of Commerce. The full name of the report is “Full Report on Manufacturers’ Shipments, Inventories and Order” but is more commonly known as Factory Orders. This report typically follows the Advance Release on Durable Goods Report, which provides data on new orders received from more than 4,000 manufacturers of durable goods.
The factory orders report includes four sections:
New orders - indicating whether orders are growing or slowing
Unfilled orders - indicating a backlog in production
Shipments - indicating current sales
Inventories - indicating strength of current and future production
Figures within the factory orders report are reported in the billions of dollars and also in a percent change from the previous month. Factory order data is often mundane, mostly because the report of durable goods orders comes out a couple weeks earlier, and includes orders for capital goods, a proxy for equipment investment. However, the factory orders report reveals more detailed information than the durable goods orders report.
The factory orders report includes information about both durable and nondurable goods. Durable goods refer to items that do not have to be purchased frequently, such as appliances, lawn and garden equipment, motor vehicles and electronics. In contrast, nondurable goods include fast-moving consumer goods such as food, clothing, footwear, medication, cosmetics and cleaning supplies.
Because the performance of investment markets is heavily influenced by the overall economy, investors recognize the importance of monitoring indicators such as factory orders to gain insight into growth trends. As with other indicators that monitor manufacturing and production, equity markets will be positively affected when the factory orders report shows an increase in production.
Why Factory Orders Matter
Factory orders are economic indicators, meaning they signify an overall direction of the market and economy. When factory orders increase, it usually means the economy is expanding as consumers demand more goods and services, which in turn requires retailers and suppliers to order more supplies from factories. An increase in factory orders doesn't always mean good news, however, as such a change can also be a sign of inflation. Alternatively, when factory orders decrease, it typically means the economy is contracting, meaning consumers are showing less demand for goods and services, and thus fewer supplies need to be ordered.