New orders for durable goods rose 4.9% in July, well above consensus expectations for a 3.2% increase. In addition, the June numbers were revised to a drop of just 1.3% instead of a 2.5% decline. This was the biggest increase in two years.
Since aircraft count as durable goods — and a few orders for jumbo jets can really jerk the numbers around — it is important to look at the orders excluding transportation equipment. There the news was good, but not as good. Orders rose 0.8%, just slightly below consensus expectations of a 1.0% rise. However it did mark a thrid straight month of increases, following rises of 2.5% in June and 0.8% in May.
Apparently Boeing (BA) had a good month, as orders for transportation equipment jumped 18.4% — more than reversing a 12.0% slide last month. It’s mostly Boeing, and perhaps some of the private jet firms like Textron (TXT). Non-defense aircraft orders soared 107.2%. It is a very volitile area, though — last month they were down 30.0% and in May they were up 60.4%.
Auto firms like Ford (F) are also in that catagory, and the now-expired (and wildly successful) “Cash for Clunkers” program cleared out dealer lots. Motor vehicle oreders were up just 0.9% in July following declines of 0.2% and 8.4% in June and May, respectively. and led them to restock. The program really only got underway at the end of July, so we will probably see a big increase in that area in August.
Another part of the report to pay attention to is non-defense capital goods orders, since that is a very good proxy for how much businesses are investing — the I in the C+I+G + (X-M) = GDP equation. There, the monthly news was also very good, but again mostly driven (flown?) by aircraft. In total, orders were up 8.6% in July, following a decline of 0.4% in June and a 9.1% rise in May. Strip out aircraft though and non-defense capital goods orders actually fell 0.3%, following increases of 3.6% and 4.3% in June and May, respectively.
While the monthly news is good, the year-over-year data reminds us of just how deep a hole we have dug. Relative to last year, total durable goods orders are down 25.8%, while orders ex-transportation are down 22.9%. Transportation equipment orders are down 33.8%. Non-defense capital goods orders are down 31.0%, and if you strip out aircraft they are down 23.0%.
Orders are a leading indicator, since you need the order before you build and ship something. Shipments are a coincident indicator, or at least coinident for the month they refer to. There, activity was up across the board for all five series I have mentioned, ranging from a 2.2% gain in total durable goods ex-transportation down to a a 0.5% gain for non-defense capital goods ex-aircraft. All five were also positive in June, but all were negative in May.
However, we are not totally out of the woods yet. If you compare the year-over-year change in the shipments numbers, the declines are much smaller than for the orders numbers. Total durable goods shipments are down 19.3% from a year ago, ditto for shipments ex-transportation. Transportation equipment shipments are down 19.5%.
On the capital goods front, the non-defense total is off 15.9%, while if aircraft are stripped out, the number is off by 16.3%. Since you need an order before you can have a shipment, this implies there is still some weakness in the pipeline.
Historically, durable goods are an important driver in economic recoveries (housing is not included in durable goods, but in many ways it is the ultimate durable good). So this report is yet another in the string of good economic reports we have been getting. The big question: is this simply inventory restocking going on, or a reflection of improved end demand? If it is end demand, how much of it is due to the artifical stimulus being added to the economy?
Those are the keys to how durable this recovery will be, and how robust. However, it now seems clear to me that the economy is starting to climb out of a very deep hole.
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Read the full analyst report on “TXT”
Read the full analyst report on “F”
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