What Are Factory Orders?
Factory orders are economic indicators of the dollar value for goods from factories. Based on the U.S. Census Bureau, factory orders are categorized into two major groupings: durable and non-durable goods.
Understanding Factory Orders
Factory orders are released monthly in a report by the Census Bureau of the U.S. Department of Commerce. The full name of the report is “Full Report on Manufacturers’ Shipments, Inventories and Orders (M3),” but it is more commonly known as Factory Orders. This report typically follows the Advance Report on Durable Goods, which provides data on new orders received from about 5,000 manufacturers of durable goods.
More comprehensive than the Durable Goods Report, the Factory Orders Report examines trends within industries. For example, the Durable Goods Report may account for a broad category, such as computer equipment, whereas the Factory Orders Report will detail figures for computer hardware, semiconductors, and monitors. This lack of detail in the Durable Goods Report is attributed to the speed at which it is released.
The factory orders report includes four sections:
- New orders, which indicate whether orders are growing or slowing
- Unfilled orders, which indicate a backlog in production
- Shipments, which indicate current sales
- Inventories, which indicate the strength of current and future production
Figures within the factory orders report are reported in the billions of dollars and also as a percent change from the previous month and previous year. Factory order data is often mundane, mostly because the report of durable goods orders comes out a couple of 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 durable and nondurable goods. Durable goods have an expected life of at least three years and often refer to items not 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, factory orders reports showing an increase in production positively affect equity markets.
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 as such a change can also be a sign of inflation. Alternatively, when factory orders decrease, it typically means the economy is contracting—consumers are showing less demand for goods and services and thus fewer supplies need to be ordered.