New Orders for Durable Goods rose just 0.3% in July. That was far below the consensus expectations for an increase of 3.0% (oh, what a difference a silly little decimal point can make!).
The news is worse than even that headline number suggests. All of the strength came from the extremely volatile Transportation Equipment side, and more specifically, from the Non-Defense Aircraft component. That is mostly orders for big 777s and 747s 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 fell 3.8%, well below expectations for a 0.5% increase. Overall, Transportation Equipment orders were up 13.1%, and more specifically, Non-Defense Aircraft orders soared 75.9%.
If one wants 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 up 0.3% in July on top of a 0.2% increase in June.
In Search of a Silver Lining
If there is a silver lining in this report it is that last month’s numbers were revised sharply higher. Total new orders had been thought to have fallen by 1.2% in June, but that was revised to a decline of just 0.1%. Orders ex-transportation equipment were actually up 0.2% in June rather than down 0.9%, as had been previously reported.
While it is hard to see much good news other than the revisions in this report, 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 15.6% higher than last year, and if transportation equipment is stripped out, orders are up 14.5%. Excluding defense, year-to-date orders are up 16.3%.
In other words, we had a very robust recovery in orders early in the year, but that momentum is very rapidly fading. It is important to keep in mind just how weak the economy was in the first seven 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 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 tends 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 July was simply dismal, as core capital goods orders plunged by 8.0% in July, a very sharp slowdown from the 3.6% growth in June, and a 4.7% increase in May. Year to date, though, it still looks pretty good, with orders running 15.8% above last year’s pace.
Notable Industry Numbers
The area that saw the biggest decline was machinery, with orders down 15.0% on the month, reversing gains of 4.3% in June and 11.1% in May. Year to date, machinery orders are up 18.9%. In other words, the Caterpillars (CAT) and Deeres (DE) of the world have had a very nice first half of the year, but were thrown into reverse in July.
The other area showing a very sharp turn for the worse was computers. New orders fell 12.7% after increases of 0.8% in June and 4.5% in May. Year to date, computer orders are up 14.6%.
There were areas other than civilian aircraft that were showing some strength. 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 up 5.3% on the month, on top of gains of 4.0% in June and 1.7% in May. Year to date, motor vehicle orders are up 13.5%.
Extremely Weak Overall
Overall this was an extremely weak report, and is another piece of the mosaic pointing to an economy that is rapidly losing steam. The upward revisions to June are a very thin silver leaf of a lining to July’s dark cloud.
With the stimulus wearing off and state and local government forced to cut spending sharply (or raise taxes) to balance their budgets, the economy is likely to get weaker before it gets stronger. 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.
What Should Be Done
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.
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.
