These are stressful times for investors wondering what the economy will bring next year. The stress level jumped another notch for those who read this morning’s news on October’s factory orders.
New orders for manufactured goods dropped by 4.7% in October, the Commerce Department reported today. Not only does that look bad after September’s 1.7% gain, it looks downright awful based on the fact that one has to go back to 2000 to find a bigger monthly descent in the series.
To say that something’s amiss in factory orders is to reiterate a theme that’s been bubbling for some time in the economic data. To review: the economy’s slowing. How much it’s slowing is the question, although when it comes to October’s new orders for manufactured goods, there’s not a lot of room for debate.
Deciding if October will carry over into November, December and beyond is the great question that increasingly consumes investors. Of course, to judge by equity trading of late, Mr. Market looks less than stressed. Let’s rephrase that: some investors are consumed with worry, but it may take a while to find them on Wall Street these days.

The S&P 500 as we write is trading within shouting distance of its post-2000 high. It’s arguable if this is the ideal time to be an incautious bull, but buyers seem disinclined to embrace the idea that they might be ever so slightly overoptimistic. Banish the thought.
Of course, optimism isn’t without merit today. The services sector (which is by far the bigger slice of the economy relative to manufacturing) unexpectedly accelerated in November. The Institute for Supply Management’s services index advanced to 58.9 in November from 57.1 in the previous month. Any reading above 50 reflects growth.
For those who think that the Fed remains behind the curve in fighting inflation, the ISM Services news is the only game in town today. The slowdown in housing and autos, which is apparently having some spillover effect in factory orders, is more than offset by the rest of the economy, runs this line of thinking. “The service sector is really what is holding the whole economy together and providing the impetus for growth,” Michael Metz, chief investment strategist at Oppenheimer & Co. in New York, told Reuters.
Adding to the optimism is the government’s upward revision in productivity for the third quarter. The U.S. Department of Labor reported that productivity in the manufacturing sector of the economy grew at a seasonally adjusted annual rate of 6.7% during July through September–nearly a percentage point higher than the 5.9% previously reported. Since higher productivity is said to ease inflationary pressures, it’s a tad easier to think that inflation may not be quite the beast that some say it is.
There are signs that such thinking is starting to affect trading in Fed funds futures. The May contract, for instance, is predicting that the current 5.25% Fed funds will drop to 5.0% at some point in the spring, if not earlier. What might compel the Fed to cut rates? Easing inflation pressure is one factor. Another? An easing economy, which brings us back to the lower factory orders. And that’s where we came in….