U.S. factory orders fall, inventory liquidation under way

By Lucia Mutikani

WASHINGTON (Reuters) - New orders for U.S. factory goods fell for a second straight month in September as the manufacturing sector continues to struggle under the weight of a strong dollar and deep spending cuts by energy companies.

Motor vehicle production, however, remains a bright spot as orders surged in September. That trend is likely to persist as automakers reported on Tuesday that sales in October were the best in 14 years.

"This morning's report provides little new signal on the state of U.S. manufacturing. Demand for many categories of manufactured goods continues to struggle from the effect of a stronger dollar, weak foreign demand and lower energy prices," said Jesse Hurwitz, an economist at Barclays in New York.

The Commerce Department said new orders for manufactured goods declined 1.0 percent after a downwardly revised 2.1 percent drop in August. Factory orders were previously reported to have declined 1.7 percent in August.

Orders for automobiles and parts rose 1.5 percent in September after falling 2.0 percent in August.

Auto sales jumped 13.6 percent in October from a year ago to an annual rate of 18.24 million units, the highest October level since 2001, according to Autodata Corp. Sales rose to a 18.17 million-unit rate in September.

October's increase suggested that consumer spending remained robust after two straight quarters of strong increases and bolsters expectations of a December interest rate hike from the Federal Reserve.

The dollar firmed against a basket of currencies and stocks on Wall Street rose. U.S. government debt prices fell.

Factory activity, which accounts for about 12 percent of the economy, is also being constrained by efforts by businesses to reduce an inventory overhang and tepid global demand. But the worst could be over for the sector after a report on Monday showed new orders rose in October for the first time since July.

The dollar has gained 16.8 percent against the currencies of the United States' main trading partners since June 2014, which has undercut export growth and weighed on the profits of multinational corporations like Procter & Gamble Co. (NYSE: PG) and 3M Co. (NYSE: MMM).

At the same time, a plunge in oil prices has pressured revenues for oil field companies like Schlumberger (NYSE: SLB) and diversified manufacturer Caterpillar Inc (NYSE: CAT).

INVENTORIES BEING LIQUIDATED

The factory orders report also showed a 0.4 percent drop in manufacturing inventories, which was bigger than the government had assumed for its advance third-quarter gross domestic product estimate published last week.

Economists said the factory inventory drop suggested the third-quarter GDP estimate could be lowered by at least one-tenth of a percentage point to a 1.4 percent annual pace when the government publishes its first revision later this month.

A slow pace of inventory accumulation accounted for the bulk of the sharp step-down in growth from the second quarter's brisk 3.9 percent rate.

Still, the September drop in factory inventories is an encouraging sign for the sector as it suggests orders will rise in the months ahead. The inventories-to-shipments ratio was unchanged at a still lofty 1.35 in September.

"A steady pace of liquidation will eventually boost output as orders move closer to sales and input utilization levels," said Kevin Cummins, senior economist at RBS in Stamford, Connecticut.

Manufacturers reported on Monday a decrease in the share of customers who believed inventories were too high, and a fall in the stock of unsold goods at factories in October.

The Commerce Department also reported that September orders for non-defense capital goods excluding aircraft - seen as a measure of business confidence and spending plans – slipped 0.1 percent instead of the 0.3 percent drop initially reported last month.

This also supports the view that the worst of the manufacturing slump might be over. Shipments of these so-called core capital goods, which are used to calculate business equipment spending in the GDP report, increased 0.5 percent in September as reported last month.

(Reporting By Lucia Mutikani; Additional reporting by Bernie Woodall in Detroit; Editing by Andrea Ricci and Meredith Mazzilli)

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