New Orders for Durable Goods fell 1.3% in July. That was slightly better than the consensus expectations for a decline of 1.4%.
The news is better than the headline number suggests. All of the weakness came from the extremely volatile transportation equipment side, and more specifically, from the non-defense aircraft component. That is mostly orders for big 777’s and 747’s from Boeing (BA), which are very expensive items. It also includes orders for business jets from firms like Textron (TXT). A few orders for new jumbo jets can really skew the numbers for the month.
Excluding transportation equipment, new orders rose 2.0%, well above expectations for a 0.6% increase. Overall transportation equipment orders were down 10.3%, and more specifically, non-defense aircraft orders plunged 40.2%.
If one want to gauge how much demand for long lasting goods is coming from the private sector, then one needs to strip out orders from the Pentagon. Excluding defense, orders for capital goods were down 1.3% in July reversing a 0.7% decrease in July.
Last month’s numbers were revised sharply higher. Total new orders had been thought to have risen by 0.3% in June, but that was revised to a rise of 0.7%. Orders ex-transportation equipment were actually down 2.8% in June rather than down 3.8%, as had been previously reported.
Longer-Term View
Even if one strips out the most volatile sectors, like transportation equipment, durable goods orders can move around a lot from month to month. It is worth taking a step back and look at the longer-term picture.
If you look at total new orders so far in 2010 relative to the total new orders in the first seven months of 2009, things still look pretty good. Total new orders year-to-date are running 15.2% higher than last year, and if transportation equipment is stripped out, orders are up 14.7%. Excluding defense, year-to-date orders are up 16.0%.
In other words, we had a very robust recovery in orders early in the year, but that momentum is fading. It is important to keep in mind just how weak the economy was in the first eight months of 2009. The year-to-date gains say as much about the conditions last year as they do about current conditions. It would be a big mistake to think that the year-to-date numbers represented some sort of normal growth rate.
Core Capital Goods
One of the areas that this is most apparent in is in what is known as “core capital goods.” Those are orders for non-defense capital goods, excluding aircraft. That is a very good proxy for what businesses are investing in equipment and software.
That investment is a direct input into the GDP growth calculations, and one of the real bright spots for the economy in the first half of the year. That is the sort of spending that is a bet on the economic future of the country, and is also one of the areas that trends to swing with overall economic conditions. Those swings are a big factor in determining if the economy is growing or shrinking.
On that front, the news in August was a turn for the better from a dismal July, as core capital goods orders rose by 4.1%, versus a decline of 5.3% in July (although that was revised up from a decline of 8.0%), and even better than the 3.6% growth in June. Year to date looks pretty good, with orders running 17.0% above last year’s pace.
Areas of Notable Rebounds
Some of the areas that had the biggest declines last month rebounded nicely in August. Orders for computers and related equipment rose by 12.0%, more than reversing a 6.4% slide in July. Year to date, orders are up 17.9%.
That has a boat-load of positive implications for the Tech sector. Most directly it would be a positive for the computer makers like Dell (DELL) and International Business Machines (IBM), but there is a lot of “pin action” there in component firms such as the chipmakers and disk drive firms such as Western Digital (WDC). Not exactly awful news for the software firms like Microsoft (MSFT), either.
The Machinery industry saw new orders rise by 3.9%, but that is only a partial reversal of the 9.6% plunge in July. Year to date, though, things are not so bleak in the metal bending world, with orders up 20.7%.
Other Areas of Weakness
There were areas other than civilian aircraft that were showing some weakness. Most notable of these was motor vehicles, a category that includes not just cars from Ford (F) but big trucks from Paccar (PCAR) as well. There, orders were down 4.4% on the month. Don’t cry to much for Detroit (well at least the Auto industry — the city itself is another story), as that comes after gains of 4.6% in June and 3.9% in June. Year to date, motor vehicle orders are up 13.2%.
Verdict: Pretty Good News
Overall this was a fairly good report. The mosaic is starting to suggest that the slowdown we saw in the economy during the summer was just a bit of a pause in the recovery, not the start of a double dip. The upward revisions to July suggest that some of the worries were overblown.
That does not at all mean that we are in a robust V-shaped recovery, just that this plodding semi-recovery is not about to plunge into a renewed downturn. With the stimulus wearing off and state and local government forced to cut spending sharply (or raise taxes) to balance their budgets the economy, there is not a lot of fuel to spark a robust recovery.
Consumers are still trying to deleverage their balance sheets by paying down debt and building up their savings. After trillions upon trillions of their wealth vaporized in the collapse of the housing market, they have no choice but to do so.
Businesses still have plenty of excess capacity, so the only reason to invest is in areas that cut costs, not in areas that expand capacity. Cutting costs usually means substituting capital for labor. That helps raise productivity, but is not particularly helpful in reducing unemployment. Very low interest rates do help spur investment, but regardless of how little it costs to borrow, no business is going to want to invest in capacity that is just going to sit idle from lack of demand.
More Stimulus Needed
In such an environment we need more fiscal stimulus from the government. Crowding out of the private sector is not an issue right now. That only happens when the government has to compete with the private sector for real resources, like qualified employees. Right now, the government would not be competing with the private sector, but with idleness and unemployment.
It is downright stupid not to take on that competition, especially when it costs the government so little to borrow long term. Talk about sharply cutting federal spending — especially for the social safety net — is not just cruel, it would be exceptionally stupid economics. If defense and the popular entitlement programs for seniors and veterans are off the table, balancing the budget through spending cuts would require the shut down of the entire rest of the federal government.
Thus, anyone who suggests that we could keep the high-end tax cuts, and balance the budget through cutting spending a) has never looked at the federal budget and has no idea what the money is spent on b) deliberately misleading you, or c) advocating getting rid of the FDA, the SEC, the court system, the national parks, the Department of Justice, the federal prison system, the FBI, all spending on highways, food stamps, crop subsidies, Pell grants and the EPA. I would put my money on option B.
Dirk van Dijk, CFA is the Chief Equity Strategist for Zacks.com. With more than 25 years investment experience he has become a popular commentator appearing in the Wall Street Journal and on CNBC. Dirk is also the Editor in charge of the market beating Zacks Strategic Investor service.
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