U.S. Factory Orders Rebounded In May

On July 3, the Commerce Department reported that the U.S. factory orders for the month of May rebounded and entered the positive territory following a stiff decline in April. The increase in May marked the third rise in the past four months. This indicates that the U.S. manufacturing sector, which constitutes around 12 percent of GDP, is increasing capital spending driven by massive tax overhaul, deregulatory measures and strong domestic and global economies.

The worldwide demand for manufacturing products is on the rise. U.S. manufacturing industry is benefiting from strong global demand, which is leading to a sharp rise in factory orders. Against this backdrop, it will be prudent to invest in stocks that are poised to gain from the solid factory orders data.

Robust Factory Orders In May

U.S. factory orders rose 0.4 percent in May, buoyed by strong demand for machinery and military wares. This was in contrast to a 0.4 percent (after revision) decline in April. New orders for U.S. manufactured goods in May increased by $1.8 billion to $498.2 billion. Meanwhile, shipments of manufactured goods inched up 0.6 percent ($2.8 billion) to $496.1 billion. This marked the 12th month of increase in the last 13 months.

On July2, the Institute for Supply Management reported that the U.S. manufacturing index rose to 60.2 percent in June from 58.7 percent in May. The June reading was highest in last four months as well as better than the consensus estimate of 58.4 percent. Notably, readings over 50 percent indicate more companies are expanding instead of shrinking. Per the ISM report, 17 out of 18 industries witnessed expansion last month.

Immediate Concerns

The U.S. manufacturing sector is currently plagued with three concerns. First, tariffs imposed on steel and aluminum and several industrial intermediary products have raised input costs. Moreover, ongoing trade related conflicts between the United States and its major trading allies like China, European Union, Canada, Mexico, to name a few are deteriorating with each passing day. As a result of these trade conflicts, U.S. exports have become vulnerable to retaliatory tariffs.

Second, the U.S. labor market is at its sturdiest since recession. The unemployment rate declined from 3.9 percent in April to 3.8 percent in May. The stiff decline in the unemployment rate indicates the extent to which the labor market has tightened, resulting in shortages of skilled labor. This may result in hike in wages.

Third, the Fed has increased its 2018 PCE (personal consumption expenditure) inflation projection from 1.9 percent in March to 2.1 percent. However, the core PCE inflation — the key inflation measurement tool and the central bank's preferred inflation barometer — was up to 2 oercent from 1.9 percent in March. This may force the central banks to raise interest rate consequently increasing the cost of funds.

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