New Orders for Durable Goods fell 0.9% in January. That was far below the consensus expectations of an increase of 1.1%. As a partial silver lining, the January numbers were revised upwards. It was first reported as an increase of 3.2%, but now they say new orders rose 3.6%. Still, the miss this month is much bigger than the upward revision to last month.

The part of the story was the extremely volatile Transportation Equipment side, and more specifically, from the Non-Defense Aircraft component, which is often the case when we get an unusually good (or bad) headline durable goods number. 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 fell 0.6%, far below expectations for a 1.8% increase.

Overall transportation equipment orders were down 1.9%, and non-defense aircraft were up 26.7%. Last month’s numbers were heavily revised for the sector. Total transportation equipment orders are now seen as having been up 29.6% in January, when it was originally reported as an decline of 7.6%. More specifically, non-defense aircraft orders rose a stunning 5564%, not the 4900% first reported. No I didn’t forget to put in a decimal point. It’s just a case of dividing by almost zero.

The non-defense aircraft numbers are beyond volatile. In December, aircraft orders dropped to almost nothing, falling 97.2% (revised from a 97.1% decline) and that came on the heels of a 59.6% drop in November.

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. Falling defense orders were a big part of the weakness this month. Excluding defense, orders for durable goods were up 0.4% after rising 2.8% (revised from 1.9%) in January, after falling 0.5% (revised from down 0.2%) in December.

Extremely Disappointing Numbers

This month’s numbers are extremely disappointing, especially if that aircraft component is stripped out. Last month’s numbers were revised sharply higher, and that is the third month in a row that has happened. The January revisions were much smaller than those of December last month.

Those December revisions were some of the largest I can recall seeing, and I have been looking at this data and writing about it as it comes out for five years now. Usually the revisions to the prior month are a few tenths of a percent, not over 2 full percentage points. The changes in the base for month-to-month changes makes interpreting the current month numbers more difficult.

One of the most significant details of this report 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 trends to swing with overall economic conditions. Those swings are a big factor in determining if the economy is growing or shrinking.

Core Capital Goods

On that front, the news so far this year is just plain ugly. Core capital goods orders fell by 1.3% after a 6.0% tumble in January (revised from a decline of 6.9%). If it is not revised away next month, it would be a sign that businesses are pulling in their horns on new investment, and that sure will not help the recovery.

While the rebound of non-defense aircraft is the biggest sector story in this report by a very wide margin, it is not the only one of note. While a total lack of orders for last month can hardly be good news not only for the big names like Boeing, and the big name suppliers like United Technologies (UTX) and Honeywell (HON), but eventually it is bad news for thousands of much smaller sub-contractors as well.

It is not surprising to see a rebound, as even with higher fuel costs, I don’t think the civilian aviation industry was going to disappear entirely, which was what was implied by the December numbers. While the civilian side of the Aerospace industry was rebounding, the defense side was taking a hit. Orders for defense aircraft fell by 18.4% in December, reversing a 18.5% rise in January (revised from an increase of 20.6%).

If the country is going to make any progress on bringing down the deficit, defense spending is going to have to be on the table, and that would probably mean very little growth in spending on new planes and helicopters. On the other hand, we do seem to be finding more and more places to use those Defense aircraft. Overall defense capital goods orders (including aircraft, but also tanks and ships and such) were down by 24.8%, but that is after a 33.7% increase in January.

Orders for computers (and related gear) fell by 0.4%, the third month in a row of declines. In January orders were down 4.4% (revised from a 9.6% decline), and that is after a 9.8% fall in December. That is starting to get worrisome, and is very bad news for the Tech sector.

There were some other dark spots in the report as well, most notably orders for Machinery, which fell 4.2% in February, on top of a 12.7% decline in January (revised from a decline of 13.0%). December’s Machinery orders were a very robust increase of 16.3%.

Bad, but Better Than Headline

Overall this was an ugly report, but not quite as bad as the headline would imply. The upward revision to the January numbers takes bit of the edge off of the bad news. The worst of the weakness was from Defense spending.

Still, the civilian capital spending components of the report were disappointing, with orders for computers and machinery weak. Business spending on equipment and software has been one of the driving forces behind the recovery so far, and it is now looking like it is getting soft. It will be interesting to see how much the February numbers are revised next month.

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.

Housing construction is normally a major positive force in pulling us out of recessions, but is totally missing in action this time around. Higher oil prices will also take a bite out of consumer’s wallets, leaving them with less money to spend on other things. On the other hand, there are indications that the pace of job creation is going to accelerate, and that should have the effect of raising consumer spending.

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 and immediate expensing do help spur investment, but regardless of how little it costs to borrow, or the ability to quickly write off the investment on their taxes, no business is going to want to invest in capacity that is just going to sit idle from lack of demand.
 
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