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Factory orders maintain a solid pace, signaling healthy freight demand in the 2nd quarter

Manufacturing growth is likely to remain solid in the 2nd quarter, as orders for new production remained healthy through March.

Data from the Census Bureau showed that new factory orders rose an impressive 1.6% in March from January’s levels. This slightly exceeded consensus estimates of a 1.3% increase and follows a 1.6% gain in the previous month that was larger than initially reported.

Much of this increase in manufacturing orders was expected after the advance report last week on durable goods orders. A surge in commercial aircraft orders helped boost the durable goods side of the manufacturing sector, which otherwise saw a modest monthly gain. This morning’s report contained additional information on nondurable manufacturing, including goods such as clothing, chemical products, and paper. Orders for nondurable goods rose by 0.5% in March, erasing last month’s decline and pushing year over-year growth to 6.5%.

For the quarter, factory orders rose at an impressive 7.0% annualized pace excluding the volatile aircraft component. This is impressive from a historical perspective, but falls well below the 13.2% surge in the previous quarter. (Story continued below)   

 Factory order growth slipped in the 1st quarter, but remains strong
Factory order growth slipped in the 1st quarter, but remains strong

Manufacturer’s new orders serve as a glimpse into what manufacturing activity will be in upcoming months, as factories work to fill the orders that exist. Orders growth typically leads actual growth in production by 1-2 months, which would suggest that manufacturing production will contionue to enjoy healthy growth well into the 2nd quarter.

This manufacturing activity helps provide part of the foundation for domestic freight demand in the economy. As such, the data from the first quarter again points to solid freight demand conditions, even if things have eased somewhat in recent months.   

Behind the numbers

This morning’s results were largely expected after the durable goods report last week, but the nondurable side did surprise on the upside by a decent amount. The orders numbers began decelerating at the start of the year and are consistent with the general theme of a normalizing economy after a post-hurricane season surge in activity last year

It is also worth noting that the orders numbers indicate healthy demand, but survey data suggests that manufacturers are struggling to keep up. Data from the ISM manufacturing survey and the Fed regional surveys all say that manufacturers are swamped with orders and the backlog is building up. Part of this is driven by the manufacturing sector’s struggle to find skilled labor, and part is due to supply chains getting congested due to trucking capacity constraints and trade policy. In either case, there may be an abnormal disconnect that develops between orders and actual production if manufacturers continue to struggle to keep pace.

Ibrahiim Bayaan is FreightWaves’ Chief Economist. He writes regularly on all aspects of the economy and provides context with original research and analytics on freight market trends. Never miss his commentary by subscribing.