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Economic Watch: Rising Factory Orders Latest Indicator of Interest Rate Hike

An increase in new factory orders is one of the latest economic signs that the Federal Reserve is moving close to another jump in interest rates, some analysts believe.

Evan Lockridge
Evan LockridgeFormer Business Contributing Editor
March 6, 2017
Economic Watch: Rising Factory Orders Latest Indicator of Interest Rate Hike

 

3 min to read


An increase in new factory orders is one of the latest economic signs that  the Federal Reserve is moving close to another jump in interest rates, some analysts believe.

New orders for manufactured goods in January increased 1.2% from the month before, according to a full Commerce Department report released Monday, slightly better than a Wall Street consensus estimate. It was boosted by sizable jumps in the notoriously volatile aircraft components for both defense and nondefense.

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This followed an unrevised 1.3% improvement in December while new orders are up 5.5% from January 2016.

Orders for manufactured durable goods increased 2% in January following two straight months of declines, better than the first estimated 1.8% gain.

Total shipments of factory goods increased 0.2% in January following a 2.5% surge in December, marking 11 consecutive monthly improvements.

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Shipments of so-called “core-capital goods,” which are an indication of business investment and are used in calculating the nation’s gross domestic product, fell 0.4% in January, better than the first reported 0.6% drop.

“On balance, the hard data in the manufacturing sector continue to show improvement, although the pace has been slower than sentiment indicators alone would indicate,” said Tim Quinlan, senior economist at Wells Fargo Securities.

He noted that core capital goods orders are up 8.7% on a three-month average annualized basis. That's the fastest pace since 2014 and it corroborates some of the rising sentiment seen in other indicators.

This and other recent indications, such an strong employment, rising prices and anecdotal evidence of a firming gross domestic product, have led some analysts to say they believe the Federal Reserve will increase interest rates when it meets later this month.

Among them is CNBC’s Jim Cramer, who said last week that "The rest of the economy is strong enough to take it” and there is no excuse for the central bank to not make its third increase is less than 18 months.

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Also, according to Forbes.com, speaking in Chicago on Friday, Federal Reserve Chair Janet Yellen said that as long as there aren't any major surprises from indicators on jobs and inflation over the next few days, a rate hike "would likely be appropriate" at the Fed's next meeting, which concludes on March 15.

Despite a number of Fed comments suggesting that a near-term rate hike remains a “possibility,” the market had continued to shrug off the likelihood of a rate adjustment later this month, according to Stifel Fixed Income Chief Economist Lindsey Piegza.

She explained that late last week the February Federal Open Market Committee (FOMC) statement suggested a third-round rate hike “fairly soon” and still market participants continued to discount the probability of a change in the current level of the Fed funds rate just one and a half weeks from now. 

“Oddly enough, it wasn’t until two consistently hawkish Fed members reiterated that current economic conditions warrant a more aggressive policy stance and the President addressed Congress, offering little in the way of details or a specific timeline for legislative initiatives, that the market began to consider a March rate hike as of realistic possibility,” Piegza said.

She concluded that amid “still-tepid economic data suggesting little additional momentum in the underlying economy, Federal Reserve officials continue to issue warnings to the market that a near-term adjustment in policy is imminent, while noting the market has been disappointed before after buying into individual Fed members’ comments. 

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“Unless the FOMC opts to abandon their data-dependent stance in exchange for one of fiscal policy anticipation, the Fed will likely continue to exercise patience, pulling the rug out from under the market’s certain expectation of a third rate hike come the 15th,” Piegza said.

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