Factory orders race ahead, driving companies like Union Pacific

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Factory orders

The US Census Bureau will release the factory orders report for March on Friday, May 2. The Bureau already released an advance report on factory orders and shipments for March last week.

Highlights from the advance March estimate

  • New orders for manufactured durable goods were estimated at $234.8 billion in March, an increase of $6.0 billion or 2.6% over February.
  • Orders for transportation equipment rose the highest—a $2.8 billion or 4% increase to ~$74 billion.
  • Shipments of manufactured durable goods were up by $2.5 billion or 1.1% to $236.6 billion in March. Transportation equipment shipments again led the increase, increasing by $1.0 billion or 1.5% to ~$70 billion,
  • Unfilled orders for manufactured durable goods in March increased by $6.1 billion or 0.6% to $1,068.2 billion. The level was the highest since this data series was first published in 1992 and has also been up in 13 out of the last 14 months.
  • Inventories for manufactured durable goods in March increased by $1.9 billion or 0.5% to $394.1 billion. This level was the highest since this data series was first published in 1992.
  • New orders for non-defense capital goods increased by $5.4 billion or 7.1% to $80.5 billion in March, while shipments increased by $1.3 billion or 1.7% to $76.2 billion.

Implications for investors

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Transportation equipment orders are a very key component of the report, as they gauge logistics requirement from other manufacturers as well. The logistics requirement is high when manufacturers’ orderbooks are full and vice versa. So, when the demand for transportation equipment increases, it usually means increasing future shipments and orders from other manufacturers.

Investors can gain exposure to the transportation sector by investing in ETFs like the iShares Transportation Average ETF (IYT), which tracks the Dow Jones Transportation Average Index. The index measures the performance of the transportation sector of the U.S. equity market. With an expense ratio of 0.48% and assets under management (or AUM) of ~$875 million, the top holdings in IYT include railroad transportation companies, Union Pacific Corp. (UNP), and Kansas City Southern, Inc. (KSU).

An increase in factory orders will mean the economy is expanding, as demand is picking up. This would imply higher revenues and profits for companies in the S&P 500 Index (VOO), all else equal. For bond investors, a growing economy is usually associated with increasing interest rates. Investors can benefit from increasing rates by investing in ETFs like the Invesco PowerShares VRDO Tax Free Weekly Portfolio (PVI), which tracks the Bloomberg US Municipal AMT-free Weekly VRDO Index. The index comprises municipal securities issued in the primary market as variable-rate demand obligations (VRDOs) whose interest rates are reset weekly. PVI has an expense ratio of 0.25%.

In the next part of this series, we’ll discuss the important labor indicators that will be released this week between Wednesday and Friday.

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