US: Durable Goods Orders

Tue May 26 07:30:00 CDT 2015

Consensus Consensus Range Actual Previous Revised
New Orders - M/M change -0.6% -3.0% to 1.8% -0.5% 4.0% 5.1%
Ex-transportation - M/M 0.4% -0.2% to 1.0% 0.5% -0.2% 0.6%

The capital goods sector is showing life, helping to limit April's aircraft-related decline in durable goods orders to a roughly as-expected 0.5 percent. Ex-transportation offers a core reading which is encouraging, up 0.5 percent following a 0.6 percent gain in the prior month.

Strength in nondefense capital goods excluding aircraft reflects strength in business investment which has been soft. New orders for this reading rose a strong 1.0 percent following an even stronger 1.5 percent gain in the prior month. Shipments, after rising 1.0 percent in March, rose another 0.8 percent in April which may give a bit of a boost to second-quarter GDP estimates.

Civilian aircraft have been, as they often do, distorting headlines for this report. Orders for civilian aircraft fell 3.6 percent in April, which of course pulled down today's headline, after surging 54.9 percent which really inflated the headline from March, now at a revised plus 5.1 percent (initially plus 4.7 percent).

Orders for motor vehicles are showing strength, up 0.3 percent in the month following a very strong 4.2 percent rise in March. Transportation all together fell 2.5 percent following an outsized 15.2 percent gain in March.

Other sectors of note include a 3.1 percent order surge for machinery which is the center of the capital goods group. Orders for fabricated metals rose 1.9 percent with primary metals up 1.0 percent. Computers & electronic products showed weakness, down 3.6 percent.

There are soft spots but the underlying theme is one of improvement in what is the best news in a long time out of the troubled factory sector which is struggling with weak exports and contraction in energy equipment. Today's report includes benchmark revisions that keep in place the decline that set in last year.

Market Consensus Before Announcement
Durable goods orders, held down by exports, have been shockingly weak and, due to an expected swing lower in aircraft, are expected to fall again, down 0.6 percent. But the range for this volatile report is quite wide, from minus 3.0 percent on the downside to plus 1.8 percent on the top side. At least as important as the headline will be ex-transportation which is expected to rise a respectable 0.4 percent.

Durable goods orders reflect the new orders placed with domestic manufacturers for immediate and future delivery of factory hard goods. The first release, the advance, provides an early estimate of durable goods orders. About two weeks later, more complete and revised data are available in the factory orders report. The data for the previous month are usually revised a second time upon the release of the new month's data.

Durable goods orders are available nationally by both industry and market categories. A new order is accompanied by a legally binding agreement to purchase for immediate or future delivery. Advance durable goods orders no longer include data on semiconductors since semiconductor manufacturers stopped releasing this information to the Census Bureau.

The advance durable goods report also contains information on shipments, unfilled orders and inventories. Shipments represent deliveries made, valued at net selling price after discounts and allowances, excluding freight charges and excise taxes. Semiconductor data are available for shipments and inventories. Unfilled orders are those received but not yet delivered.

In 2001, the Census Bureau shifted from the standard industrial classification (SIC) system to the North American Industrial Classification System (NAICS). This caused some realignment of major industry classifications. Given the significant revisions incurred, the historical data now begin in 1992.

Investors want to keep their finger on the pulse of the economy because it usually dictates how various types of investments will perform. Rising equity prices thrive on growing corporate profits - which in turn stem from healthy economic growth. Healthy economic growth is not necessarily a negative for the bond market, but bond investors are highly sensitive to inflationary pressures. When the economy is growing too quickly and cannot meet demand, it can pave the road for inflation. By tracking economic data such durable goods orders, investors will know what the economic backdrop is for these markets and their portfolios.

Orders for durable goods show how busy factories will be in the months to come, as manufacturers work to fill those orders. The data not only provide insight to demand for items such as refrigerators and cars, but also business investment such as industrial machinery, electrical machinery and computers. If companies commit to spending more on equipment and other capital, they are obviously experiencing sustainable growth in their business. Increased expenditures on investment goods set the stage for greater productive capacity in the country and reduce the prospects for inflation.

Durable goods orders tell investors what to expect from the manufacturing sector, a major component of the economy, and therefore a major influence on their investments.

Durable goods orders are a leading indicator of industrial production and capital spending.

The bond market will rally (fall) when durable goods orders are weak (strong). A moderately healthy report for new orders bodes well for corporate profits and the stock market, however. Durable goods orders are one of the most volatile economic indicators reported in the month and this series can be revised by significant amounts from one month to the next. More than any other indicator, it is imperative to follow either three-month moving averages of the monthly levels or year-over-year percent changes. These adjustments smooth out the monthly variability and provide a clearer picture of the trend in the manufacturing sector.

Whenever economic indicators are particularly volatile, it becomes customary to exclude the more variable components from the total. For instance, market players exclude defense orders and transportation orders from durable goods because these fluctuate more than the overall total. Incidentally, aircraft orders are the guilty culprit, which are included in both of these categories. Airplanes are ordered in quantity, not one at a time. Analysts exclude the categories containing aircraft orders because they obscure the underlying trend, not because the aircraft industry is unimportant.

Economists closely watch nondefense capital goods orders as a leading indicator of capital spending. Typically, traders follow the special series for nondefense capital goods excluding aircraft because it shows the underlying trend for equipment investment after discounting sharp swings from aircraft orders.

Durable goods orders are measured in nominal dollars. Economic performance depends on real, rather than nominal growth rates. One can compare the trend growth rate in durable goods orders with that of the PPI for finished goods to assess the growth rate in real orders.