Macro Monday 23 ~ US Factory Orders (released today 15:00 GMT)Macro Monday 23
US Factory Orders - ECONOMICS:USFO - Released Today
U.S. Factory Orders (USFO) are reported by the U.S. Census Bureau at the start of each month. The next release for the month of October is today Monday 4th Dec 2023 at 15:00 GMT.
The USFO Report provides information on the total dollar value of new orders, shipments, and unfilled orders for durable and non-durable goods. You might recall Macro Monday 18 where we looked at the at the Durable Goods Report (ticker: FRED:DGORDER ) which only provides data on new orders received on durable goods in isolation (goods lasting longer than 3 years) whilst the USFO Report is more comprehensive and includes durable goods, non-durables (items used once or not lasting a long time like light bulbs, detergent and clothing etc.), and also includes sub trends within durables and non-durables.
Let’s have a quick look at the differences between the USFO report and Durable Goods Report below;
U.S Factory Orders Versus Durable Goods
The USFO Report is more comprehensive than the Durable Goods Report, the USFO Report examines trends within industries. For example, the Durable Goods Report may account for a broad category, such as computer equipment, whereas the USFO 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.
Time Difference of the Releases: The Durable Goods Report for October was released almost two weeks ago on the 22ndNov 2023 whilst the USFO more comprehensive report (featured today) will be released today Monday 4th December 2023. It important to know this so you can get an early indication off the Durable Goods report as to how the later USFO Report may lean.
The USFO Charts
Whilst the figures within the USFO are reported in the billions of dollars, the chart shared today shows the percentage change month over month. Readings above 0% are more favorable and below 0% are less favorable. Essentially the increase or decrease shows the overall change in percentage terms orders from month to month.
Chart 1 – US Factory Orders (USFO)
▫️ The grey line on this chart shows how the volatile the percentage month to month readings can be for the USFO. For this reason we have assigned a 12 month moving average which smooths out the data making it easier to assess the longer term trend (thin Dark Blue line).
- On Chart 1 at present you can see that the 12 month MA recently came down to the just below the 0% level and has since started to turn upwards which is positive.
- From July 2023 to present we have moved from -2% to +2.8% (a positive move indeed)
Chart 2 – USFO 12 Month Moving Average (with S&P500 for reference)
▫️ In this chart we have isolated the US Factory Orders 12 month moving average and filled the area with the color dark blue from the 0% level to whatever reading was above it or below it. In other words, the USFO 12 month moving average is the exact same as in Chart 1 but illustrated differently, we just widened it vertically to make it easier to appreciate visually and we filled the area between the 0% line and whatever its reading was on the 12 month MA.
I have included the S&P500 in purple as a rough reference of what the market was doing when we fell below the 0% level on the 12 month moving average (red zones on the chart).
USFO Chart 2 informs us of the following:
- The most obvious finding when you look at the chart is that the S&P500 can go down sideways or upwards even with the USFO 12 Month MA below zero, therefore it is not a good standalone indicator of a general market decline. For this reason I have not utilized it as a pre-recession indicator.
- We can observe that sudden declines from high readings down to below 0% on the USFO 12 month MA can precede S&P500 market decline (see lower reddish arrows on the Chart 2). This appears to have happened before most market declines or as the market declines occur, its just that its happened also when the markets continued upwards, so it is a warning indicator but its not an absolute stand alone indicator. I think we can agree that if the USFO reading is going suddenly down and below 0% it is not a good thing for the market in general but price can be contrary and we need to keep in mind that the market can “climb walls of worry” for a long time.
- If we look at the red shaded areas, we can see that during these specific periods when the USFO 12 month MA was below 0%, in three out of four of the red areas on the chart you could argue that the market was range bound and moved relatively sideways, meaning real returns during these periods would have been less than ideal (Real returns are what is earned on an investment after accounting for taxes and inflation). Inflation and taxes could have more easily corroded your returns during these periods as the entry price into the red zone was not all that different to the exit price.
In reference to the real returns comment above, Lyn Alden a highly respected economist has been touting for months that she suspects a rangebound market, similar to the brief range bound markets in the first three red zones in Chart 2 (left to right). Worth keeping in mind that we recently dipped below the 0% level and should this occur again and we sustain a sub 0% level, it may indicate that real returns might be negative going forward (subject to below 0% reading). This is not a prediction and there are no guarantees. We are just looking at the data and trying to lean on the right side of probability. Three out of Four times in the recent past real returns were not great when the USFO 12 month MA fell below 0%.
Durable Goods Report
We mentioned the Durable Goods Report above which was released almost two weeks earlier than the U.S. Factory Orders (on 22ndNov 2023). Durable Goods is more specific and focuses on the obvious, durable goods (goods that last 3 years or longer) whilst the USFO Report is more comprehensive and in addition includes non-durables (items used once or not lasting a long time like light bulbs, detergent and clothing), and it also includes sub trends within durables and non-durables.
Using New Orders for Durable Goods to Anticipate Market Direction
▫️ We previously shared how the Durable Goods chart can be used to help anticipate price movements on the S&P500, in addition to providing an advance insight into the USFO report release which is released two weeks later.
▫️ The 30 month moving average for Durable Goods can act as a threshold level for buy and sell signals for the S&P500 whilst also providing advance warnings of recession and/or capitulation events. This has been clearly illustrated in the chart.
The main findings in the chart are as follows:
1. When Durable Goods Orders(blue) fall below the 30 month moving average(brown) this is sell signal
2. When Durable Goods Orders(blue) break above the 30 month moving average(brown) this is a buy signal
3. Declining durable goods and/or a fall below the 30 month moving average has offered advanced warning of recession and/or capitulation.
The chart demonstrates that using the 30 month moving average for Durable Goods New Orders can very useful in determining market trend.
At present we are above the 30 month moving average and the moving average appears to be trending upwards however the release on the 22ndNov 2023 came in lower dropping from $294 billion down to $279 billion. This provides insight into the USFO, with durables on the decline, will we see non-durables on the decline too and a lower USFO today Monday 4th Dec 2023?
We can continue to monitor the Durable Goods chart and watch for a cross of the 30 month moving average as an additional confirmation of a change to a bearish trend for the S&P500 when or if it happens. For now this is just another chart to help us identify bearish/bullish trend changes by using the economic data from Manufacturers New Orders for Durable Goods.
Similarly the USFO Report (inclusive of non-durables) which is released today should be interesting, I wonder could we see a drop down below the 0% level or a decline from the 2.8% MoM level in line with the Durable Goods decline already observed on the 22nd Nov 2023. We will find out later today.
SUMMARY
In summary, when the USFO 12 Month Moving Average drops and remains below 0% there is an increased probability of a rangebound market with an increased likelihood of negative real returns.
Separately, the Durable Goods Chart 30 month moving average has been apt at indicating buy and sell triggers for the S&P500. At present we are falling down towards the 30 moving average but we have not crossed it yet so no trigger event here. We wait for todays USFO report release and the next Durable Goods Report later in December as we do not have any trigger events on either, just cautionary data to keep an eye on.
I hope you found this useful in understanding and making use of both these important metrics which capture consumer spending habits and sentiment.
PUKA
