• U.S. factory orders declined 1.3% in May, a smaller drop than the 1.8% contraction forecast by economists.
  • April's data was revised sharply higher to a 5.3% gain from an initially reported 4.8% increase, underscoring month-to-month volatility.
  • The transportation sector, particularly aircraft and motor vehicles, drove the decline, while core business investment showed resilience.

Weaker Than April, but Not as Bad as Feared

New orders for U.S. manufactured goods fell 1.3% in May, according to data released Tuesday by the Commerce Department. The reading was better than the consensus estimate of a 1.8% decline, offering a mixed signal on the health of the industrial sector. April's gain was revised up to 5.3% from 4.8%, largely reflecting stronger demand for commercial aircraft.

Excluding transportation, orders edged up 0.3%, suggesting underlying demand remained steady. Meanwhile, core capital goods orders—a proxy for business investment—rose 0.6% in May after a 0.2% gain in April, according to revised figures.

Volatility Masks Underlying Trends

The monthly swings highlight the uneven nature of the manufacturing recovery. Aircraft orders, which can be lumpy, accounted for much of the April surge and May pullback. Boeing (BA) reported a sharp drop in new plane orders in May, contributing to the headline decline.

Shipments, a measure of current production, rose 0.1%, while inventories increased 0.3%, suggesting supply chains are stabilizing. Unfilled orders inched up 0.1%, hinting at a modest backlog.

"The factory sector is not in recession, but it's not accelerating either," said one economist. "Businesses are cautiously investing, and the data remains noisy."

Implications for the Economy and Policy

Policymakers and investors watch factory orders as a leading indicator of economic momentum. While the softer May number could temper optimism, the upward revision to April and the gain in core capital goods suggest business investment remains intact.

The data comes as the Federal Reserve monitors economic activity for signs of a slowdown. A sharp contraction could have fueled rate-cut expectations, but the smaller-than-expected decline may keep the central bank on hold.

Correction: An earlier version of this article misstated the April revision. It was revised to +5.3%, not +4.8%.