|New Orders - M/M change||-0.6%||-2.8% to 0.8%||-1.8%||-0.5%||-1.5%|
|Ex-transportation - M/M||0.5%||-0.3% to 0.8%||0.5%||0.5%||-0.3%|
Big downward revisions to April data almost sink the latest durable goods report where, however, important details show some life. Total orders sank 1.8 percent in May but this is badly skewed by a 49 percent drop in aircraft orders where outsized month-to-month swings are the norm. The April revision is the big surprise here, now at minus 1.5 from an initial minus 0.5 percent in an unwelcome reminder of how volatile this series is.
Stripping out transportation, which is where aircraft orders are tracked, shows strength in the month at plus 0.5 percent which hits the Econoday consensus. But here again, the April revision swings in and takes an initial 0.5 percent gain to minus 0.3 percent.
The key area, however, that remains on the positive side is capital goods where new orders excluding aircraft rose 0.4 percent in May vs a 0.3 percent slip in April which was initially posted at plus 1.0 percent. Shipments for this reading, in what is a plus for second-quarter GDP, show back-to-back gains of 0.3 percent.
The industry breakdown looks almost positive in this report. Many of the capital-goods industries show solid acceleration in new orders the last couple of months including machinery, fabricated metals and primary metals. Otherwise, there's only a few industries showing weakness including electrical equipment which is a negative signal for construction where signals have otherwise been strong. Motor vehicles are surprisingly flat despite the recent surge in sales.
Among other readings, unfilled orders are down for a second month at a heavy 0.5 percent while inventories are down 0.2 percent in a reading that's a negative for second-quarter GDP. Another negative for GDP is a second straight decline in shipments at minus 0.1 percent.
Export data are not isolated in this report but weakness in exports is the prime suspect behind what is another soft report out of manufacturing. Capital goods are coming up but they're coming up from a low base. Watch for the Richmond Fed report later this morning for the latest signals on June manufacturing conditions.
Market Consensus Before Announcement
Swings in durable goods orders are typically tied to swings in aircraft orders, which are tracked in the transportation component. The outlook for total orders is very soft, at minus 0.6 percent, but excluding transportation a very respectable 0.5 percent gain is forecast. Among details, watch closely for further gains for capital goods orders which would point to rising business confidence in the economic outlook.
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.