U.S. factory orders rose a better-than expected 1.0% in December, the Commerce Department announced Friday. providing more evidence that the manufacturing sector continues to heal.

A Bloomberg News economists' survey had expected December factory orders to rise 0.3%, after rising a revised 1.0% in November. Factory orders rose 0.8% in October.Even better, excluding the often-volatile transportation component (which includes airplanes and cars), factory orders increased 1.2% in December, after a revised 2.1% gain in November, up from the previously released 1.9%. Also, the durable goods component rose 2.8% in December.

Inventories Dip for First Time in Three Months

However, inventories, which had risen for two straight months, on increased business confidence about holding extra goods amid the U.S. economic recovery, dipped 0.1%, with the inventory-to-shipment ratio declining to 1.29 from 1.32 in November.

Despite the slight inventories dip, the December factory order break-down, by and large, shows a broad-based recovery in orders: Primary metals orders jumped 8.2%, machinery surged 6.6%, transportation equipment increased 2.6%, and computers rose 0.7%. However, transportation equipment orders dipped 0.5%, and electrical equipment and components declined 3.8%.

Economists follow the factory orders statistic because it provides one of the most comprehensive surveys of advance orders for durable goods -- how busy factories are likely to be in the period ahead. Factory orders also are a major value-added component of the U.S. economy. However, economists caution investors not to put too much emphasis on the initially released factory order monthly stat, as the total typically is revised in subsequent monthly reports when more-complete data becomes available to the government.

Economics Analysis

In general, it was another positive factory orders report. The key take-aways: 1) the top-line stat was better than expected, continuing a roughly half-year uptrend; 2) the inventory dip was minor, keeping the positive inventory narrative in-place; 3) the ex-transportation factory order component (which excludes often-volatile aircraft orders) also rose a healthy 1.2%; and 4) the durable goods component registered a decent 1.0% gain.

In sum, the picture is one of a broad-based factory advance, which is consistent with both a recovering economy, and a correction for an unusually large paring-back of inventories prompted by the pronounced 2007-2009 recession. Beginning in Q3/Q4 however, organic demand, led by job growth, will have to take over to maintain U.S. GDP growth.

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