The report on New Orders for Durable Goods was very noisy and full of cross-currents. The headline number for total durable goods was very strong, coming in with an increase of 2.9%, which was far above the consensus expectations of a 1.5% increase.
However, all of that was due to a jump in the extremely volatile Transportation Equipment segment, and more specifically, the super-volatile non-defense aircraft sub-segment of transportation equipment. Excluding Transportation, new orders fell 1.0%, well below the 0.7% increase that was expected.
That on the surface sounds depressing, but it really is not the case. These are month-to-month changes we are talking about here, and are thus very sensitive to what the level was last month.
Positive Revisions
The revisions to the March numbers were massively positive. Last month, total durable goods orders were reported as having declined 1.3% and orders ex-Transportation as up 2.8%. Now, after getting additional data, the Census Bureau estimates that total durable goods orders were unchanged in March, and orders excluding Transportation were up 4.8%.
If, instead of excluding Transportation goods, we exclude Defense Capital goods to get a sense of what the private sector is doing, orders rose 3.4% in April after having fallen 0.1% in March. Previously, orders excluding Defense were reported as a decline of 1.2% in March.
Longer-Term Trend
Stepping back to look at the longer-term trend, things look very healthy. Total new orders received in the first four months of 2010 are up 16.8% over the total new orders received in the first four months of 2009. Excluding Transportation, total orders on a year-over-year, year-to-date basis are up 14.3%, and excluding Defense they are up 16.9%. That is very healthy, and shows that manufacturing is coming back.
To get a sense of the state of the overall economy, it is better to focus on the numbers excluding Transportation Equipment. It is not that an order for a new 787 Dreamliner from Boeing (BA) is not a real order that will result in real economic activity. It is that each 787 costs a huge amount of money, and those orders tend to come in a very lumpy fashion, and it can make the overall durable goods series swing wildly from month to month.
While the bulk of the non-defense aircraft orders are to Boeing, it also includes orders for private jets and helicopters from firms like Textron (TXT) and United Technologies (UTX). In April, non-defense aircraft orders jumped 228.0%.
So are happy days back again in Seattle? Well maybe, but that jump comes on the heels of a 71.5% decline in March (revised down from a 67.1% decline), which in turn followed a 51.1% rise in February. On a year-over-year, year-to-date basis, though, things look great (or more precisely, things looked just plain awful a year ago) as civilian aircraft orders are up a stunning 270.3%. For transportation equipment as a whole, year to date orders are up 24.7%.
Where the Downbeat News Was
There is another sub-group in the report that is of particular interest, though, and there the news in April was a bit more downbeat. That is non-defense capital goods excluding aircraft, or what is sometimes called core capital goods. It is a very good proxy for how much businesses are actually investing in new plants and equipment, which can be a major swing factor in GDP growth.
In April, core capital goods orders fell by 2.4%. That, however, was after increases of 6.5% in March and 3.0% in February. Both of the previous months were revised higher, from 4.0% and 2.1% respectively.
Those with a “glass half empty” outlook will see it as evidence of a sharp deceleration in business investment. Those with a “glass half full” outlook will see that the overall level was basically unchanged from where we thought it was yesterday, thanks to the upward revision of the base.
Strength Year to Date
On a year-to-date basis, things still look very strong, with orders up 14.9%. There is also a bit of a seasonal pattern to core capital goods orders as well, with the first month of the quarter usually a bit weaker than the last month of a quarter.
On a year-to-date basis, gains are very widespread. With only one category, communications equipment, showing a decline (of 2.3%), and only two other categories, Motor Vehicles (up 9.0%) and Miscellaneous Durable Goods (up 4.4%), showing less than a double-digit gain.
On a year-to-date basis, orders for primary metals have been particularly strong, rising 45.8%, although that group did see a 2.0% sequential decline in orders in April. It is a similar case with Machinery orders — they fell sharply on a sequential basis in April (5.9%), but that is after increases of 10.5% in March and 7.1% in February (both numbers revised higher, from 8.6% and 6.9%, respectively).
Orders for computers and related products are up 18.7% on a year-to-date basis, but down 3.0% sequentially. Again, the sequential decline is more than cancelled out by the upward revisions to the previous months. In March, computer orders were up 18.1% instead of the previously reported 12.9%, and February’s rise was 5.5% instead of 4.6%. Year-to-date computer orders are up 18.7% from a year ago. That is good news not just for the likes of Hewlett-Packard (HPQ) but also for the makers of the components that go into computers, like disk drive maker Western Digital (WDC).
Our Overall Take
While this report has a lot of cross-currents in it, overall I would rate it as a net positive. The upward revisions to March and February mean that the base from which the April changes were calculated was much higher than expected. As a result, the percentage growth rates fell.
Still, it does show some loss of upward momentum, particularly if one excludes those wild and crazy civilian aircraft orders. The bigger-picture year-to-date orders are healthy almost across the board, although that is more a reflection of just what a disaster the economy was in the first four months of 2009 as it is a picture that all is sweetness and light today.
Read the full analyst report on “BA”
Read the full analyst report on “TXT”
Read the full analyst report on “UTX”
Read the full analyst report on “HPQ”
Read the full analyst report on “WDC”
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