Durable Goods Orders Drop

In October, new durable goods orders fell by 0.6%, partially reversing a 2.0% rise in September, which in turn was a partial reversal of a 2.7% decline in August. Year to date, new durable goods orders are 23.0% below the level for the first ten months of last year.

If we exclude the extremely volatile Transportation sector, new durable goods orders fell 1.3% after rising 1.8% last month. Transportation equipment includes jetliners, and one new order for a 787 from Boeing (BA) can easily swamp lots of new durable goods orders for smaller ticket items. It was mostly the Boeing order book that partially saved the day for total new durable goods orders, as orders for non-defense aircraft surged by 50.8% in the month. Last month they were up a modest 1.1%, but in August they plunged 44.0%.

Clearly if you want to make heads or tails out of this data, it is a good idea to exclude the Transportation sector. The first graph (from http://www.briefing.com/Investor/Public/Calendars/EconomicReleases/durord.htm) shows total new orders for durable goods on a year-over-year basis. While we are still deep in negative territory, it looks like we have turned the corner (note that the graphs do not include this month’s data, however; October 2008 was an awful month for new orders, so when updated the graphs should show further improvement).

However, most of the decline stems from fewer new durable goods orders from the Pentagon, another area that can be very volatile from month to month. Excluding defense, new durable goods orders actually rose by 0.4% in October after rising 1.8% in September and falling 2.7% in August. Regardless of what you include or exclude, though, on a longer-term year-to-date basis, the numbers are still very ugly, and show that we have a lot of ground to make up.

Excluding Transportation, year-to-date orders are down 20.4%, and excluding defense, orders are down 24.4%. Defense is in fact the only area to see an increase in durable goods orders on a year-to-date basis, with total defense capital goods orders up 1.0% and defense aircraft orders up 8.8%.  Non-defense aircraft orders, on the other hand, are down 59.4% on a year-to-date basis, even including the huge surge this month.

In a positive sign for the economy, new durable goods orders for non-defense capital goods — a very good proxy for business investment spending on equipment and software — rose by 1.2% in October following a 3.2% increase in September. On a year-to-date basis, though, they are down 27.6%. Still it shows that business investment might be starting to come back.

However, that number does include the non-defense aircraft, since planes are the main capital good of an airline. If aircraft are excluded to get to what is known as “core capital goods,” orders fell by 2.9% in October, reversing a 2.6% increase in September, and down 21.0% on a year-to-date basis. The second graph, (also from http://www.briefing.com/Investor/Public/Calendars/EconomicReleases/durord.htm) shows the history of core capital goods spending.  As with total orders, it looks like we have turned the corner, but have a lot of ground to make up.

One area that has seen solid increases in durable goods orders for each of the last three months is primary metals, which are sort of at the base of the food chain, and might be signaling better times ahead. In the short term it is good news for firms like Alcoa (AA), U.S. Steel (X) and Freeport McMoRan (FCX). This month they rose by 3.6%, following increases of 2.6% and 1.2% in September and August, respectively.

That area, though, has an especially large amount of ground to make up, as even with the increases in durable goods orders for each of the last three months, orders are still down 39.6% on a year-to-date basis. Three months in a row of solid gains makes it look like the rebound is a trend, and not a short-term aberration, though.

On the other hand, Computer orders, which had held up reasonably well on a year-to-date basis — down “just” 15.1% year to date — have started to turn south, dropping in two of the last three months. In October they dropped by 7.2%, following a 0.3% increase last month and a 3.1% decline in August. Thus, the high tech rebound might be less robust than many have been hoping for.

All in all, I would rate this durable goods orders report as a negative — not a disaster, but not nearly as positive as the other economic reports that we got today.

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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