The markets are up this morning with positive data of economic recovery and news of mixed party control of Congress. The stock market has historically performed the best with a mixed control of Congress and White House because Congress can’t change much. If you are like me, I am pretty much tired of hearing/talking about politics, but at the same time can’t ignore it.
Turning to a positive note, the economy does appear to be recovering with the exception of a few sectors.
This morning I was shocked to see an ad for Southwest, so even travel may be coming back soon. One of my favorite reports, the Factory Report, posted this morning a very positive outlook. See our analysis below.
The factory report beat estimates across the board in November, following small upward revisions for most of the major measures in October as well. Factory orders posted a solid 1.0% November rise after a 1.3% (was 1.2%) October gain, leaving a seventh-consecutive increase. Ex-transportation orders rose by 0.8%, after a sturdy 1.3% (was 1.2%) October rise, while transportation orders rose 2.1% (was 1.9%) after a 1.5% October increase. We saw a hefty 1.1% increase for nondurable shipments and orders, while total shipments rose 0.7%, after a 1.2% (was 1.1%) October gain. Nondurable inventories beat estimates with a 0.5% rise, after a 0.2% (was 0.1%) October gain. We saw tiny upward revisions in all the major equipment aggregates from the durable goods report. We still expect GDP growth of 4.3% in Q4 and 3.5% in Q1, after a 33.4% Q3 surge. Key numbers:
- Factory orders rose 1.0%, after a 1.3% (was 1.2%) October gain.
- Factory orders ex-transportation rose 0.8%, after a 1.3% (was 1.2%) October gain.
- Factory shipments rose 0.7%, after 1.2% (was 1.1%) October gain.
- Transportation orders rose 2.1% (was 1.9%), after a 1.5% October gain.
- Defense orders rose 3.9X% (was 3.9%), after a 22.0% (was 22.0%) October gain.
- Factory inventories rose 0.7X%, after a 0.2% (was 0.2%) October gain.
The equipment sector has rebounded sharply since May despite heightened business uncertainty. The ex-air capital goods shipments figures have set new 6-year highs in every month since August, and we’ve seen 12-year highs for shipments of computers and electronic equipment shipments since July, though we saw a -1.1% November pull-back. Total equipment shipments will reach new highs by early 2021 now that Boeing 737 MAX shipments are approved. Production bottlenecks in some industries are clearly boosting equipment demand.
Transportation orders extended their rebound through November, following declines in March and April. The rise tracked a vehicle assembly rate bounce to an 11.3 mln pace in November from 10.3 mln, versus a low of just 0.2 mln in April. Boeing orders surged to 27 planes from zero in September and October, while shipments slipped to 7 planes from 13 in October and 11 in September.
We expect GDP growth of 4.3% in Q4 and 3.5% in Q1, following a 33.4% Q3 surge. We expect equipment spending growth of 23% in Q4 and 14% in Q1, following a 68.2% Q3 clip. Inventories are expected to add $84 bln in Q4 and $104 bln in Q1, following a $283.3 bln addition in Q3. We saw inventory liquidation through the four quarters ending in Q3 that now needs to be reversed.
We assume a 0.5% November business inventory gain after a 0.8% (was 0.7%) October rise. We assume November inventory swings of -0.1% for wholesalers and 0.7% for retailers, as shown in the advance indicators report.
The overall factory I/S ratio remained at October’s 1.41, which is near the 1.40 pre-pandemic readings over the four months ending in February, from 1.41 in October. We saw an all-time high of 1.70 in April, a peak from the last recession of 1.46 in early-2009, and an all-time low of 1.14 in December of 2005.
The factory durable I/S ratio rose to 1.70 (was 1.71) in November from a 1-year low of 1.69 (was 1.70) in October, versus a 2.24 all-time high in April. We saw a 1.88 high from the last recession in April and May of 2009, and a 1.59 expansion-low in November of 2018 that was previously seen in November of 2013.