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September 2, 2016 10:05 AM, EDT

Factory Orders Post Largest Increase in Nine Months

Fiat Chrysler/Handout via Reuters

New orders for U.S. factory goods recorded their largest increase in nine months in July as demand increased broadly, an encouraging sign for the embattled manufacturing sector.

The Commerce Department reported Sept. 2 that new orders for manufactured goods rebounded 1.9% after a downwardly revised 1.8% decrease in June. It was the biggest rise since October 2015 and followed two straight months of declines.

Economists polled by Reuters had forecast factory orders rising 2% in July after a previously reported 1.5% decline in June.

The department also said orders for nondefense capital goods excluding aircraft increased 1.5% in July instead of the 1.6% rise ireported last month. These so-called core capital goods are seen as a measure of business confidence and spending plans on equipment. Core capital goods shipments, which are used to calculate business equipment spending in the gross domestic product report, fell 0.5% in July. They previously were reported to have slipped 0.4% in July.

Manufacturing, which accounts for about 12% of the economy, remains constrained by the lingering effects of a strong dollar and weak global demand, which have crimped exports of factory goods.

A collapse in oil drilling activity after a plunge in oil prices also has squeezed manufacturing by undermining business spending, leading to weak demand for heavy machinery.

In addition, a U.S. inventory correction has resulted in factories receiving fewer orders. The Institute for Supply Management reported Sept. 1 that its national factory activity index fell into contraction territory in August for the first time in six months.

In July, orders for transportation equipment surged 10.6%, also the biggest gain since last October. Orders for motor vehicles and parts slipped 0.5%. 

Orders for machinery, which have been hurt by weak demand in the energy, mining and agricultural sectors, jumped 1.4% — the largest rise in six months.

Orders for electrical equipment, appliances and components soared 3.7%, the biggest gain since June 2014. Orders for computers and electronic products rose 3.4%, the largest rise since March 2015.

Inventories of factory goods edged up 0.1% after 12 straight monthly declines. Shipments slipped 0.2%. As a result, the inventories-to-shipments ratio was unchanged at 1.35 in July.

Unfilled orders at factories decreased for a second straight month.