Durable Goods Orders Down

New orders for durable goods fell to $159.6 billion in June, a drop of 2.5% from May’s level. The May increase was also revised to an increase of just 1.3% from its originally reported 1.8% increase.

However, the reason for the decline was a 12.8% drop to $36.5 billion in orders for transportation equipment. Orders for transportation equipment is notoriously volatile, as just a few orders for jumbo jets can really skew the numbers.

Just how volatile? Well, if we look at just non-defense aircraft orders, they were down 38.5% in June following a 60.4% jump in May, while Defense Aircraft orders were up 30.1% following a 0.3 increase in May.

Excluding transportation equipment, new orders actually rose by 1.1%. The swing in transportation orders was much bigger than expected. The consensus was for a total decline of 0.6%, an unchanged reading excluding transport (follow a rise of 0.8% in May, revised down from a 1.1% increase). So those numbers were really something of a mixed bag.

On the other hand, much of the good news came from another volatile area, defense orders. Excluding defense, orders were down 0.7%. Perhaps the most interesting of the numbers in the report is new orders for non-defense capital goods. This is a very good proxy for investment in the real economy, or the “I” in the old C + I + G - Net exports = GDP equation.

There the news was not good, with orders dropping by 3.4%, partially reversing a 9.1% gain in May, but that followed a 3.5% drop in April. However, once again it was the aircraft that suppressed the numbers — excluding them, orders were up 1.4% following a 4.3% rise in May and a 3.5% drop in April.

Since the numbers can be volatile from month to month, it also makes sense to look at how cumulative orders on a year-to-date basis have been. There, the picture is still one of deep economic contraction, with the pace of total new orders off 26.7%, ex-transportation off 23.4% and ex-defense down 28.4%. Year-to-date, total capital goods orders are down 28.8%, and non-defense capital goods orders are down 32.7%.

Year-over-year numbers show a similar pattern, as can be seen in the two graphs below (from http://www.briefing.com/Investor/Public/Calendars/EconomicCalendar.htm).  They both paint a picture of things stabilizing at very low levels. However, keep in mind this recession has been going on for more than a year now, so year-over-year percentage changes are coming off numbers that were already down.

Shipments of durable goods fell by 0.2%, which is not too bad, but that was the 11th straight monthly decline, a new record. Unfilled orders also declined by 0.9%, for the ninth month in a row — also a duration record. Inventories of durable goods fell to $318 billion, a 0.9% decline following a 0.3% drop in May. Thus, while the longer-term picture was mixed, the coincident and near-term numbers were still quite weak.

The report does give more detail about the specific industries with rising and falling orders. The big winner for the month was primary metals, where orders jumped by 8.9% following two previous near unchanged readings. That should be good news for firms like U.S. Steel (X) and Alcoa (AA).

Orders for machinery were also strong, rising 4.4% following a 7.3% increase in June. I find this to be very surprising in light of the record low levels of capacity utilization. I’m not sure just why anyone is buying new machines in this environment. However, it would be excellent news for firms like Parker Hannifin (PH).

On the downside, the plunge in non-defense aircraft orders, while very volatile and reversing a great May, is not good for Boeing (BA) or major suppliers to it like Honeywell (HON).

Overall I would rate the report as a minor negative. We are in a pattern of three steps forward, two steps back in the economic numbers (at least it looks like that — not two steps forward, three steps back). This report was, overall, one of the steps backward.

The economy is out of the intensive care unit, but the patient is still quite sick and it will be a long convalescence where it is not feeling too good. The patient is still very vulnerable to secondary infections and other complications, but the prognosis is improving.

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Comment by Kimberly Amadeo

2009-07-29 14:47:43

Excellent analysis. I agree completely that Durable Goods should be measured year-over-year. It should be no surprise that the GDP report on Friday will be negative with Durable Good down 25% y-o-y for the entire quarter.

BTW, are you on Twitter? Would love to follow your posts.

Kimberly

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