US: Durable Goods Orders

Wed Nov 25 07:30:00 CST 2015

Consensus Consensus Range Actual Previous Revised
New Orders - M/M change 1.5% 0.2% to 2.7% 3.0% -1.2% -0.8%
Ex-transportation - M/M 0.4% 0.1% to 1.3% 0.5% -0.4% -0.1%
Core capital goods – M/M change 1.3% -0.3% 0.4%
New Orders - Yr/Yr Change 0.5% -3.0% -2.6%
Ex-transportation - Yr/Yr -2.4% -5.3% -5.0%
Core capital goods – Yr/Yr 0.4% -7.3% -6.6%

The factory sector is showing life with new orders in October up a very solid 3.0 percent which just exceeds Econoday's high-end forecast. Excluding transportation, and orders tied to the biennial Dubai airshow, new orders rose 0.5 percent which is also solid and higher than expected. And underscoring the gains in a significant way is sudden strength in orders for core capital goods, up an outsized 1.3 percent with the prior month revised from a decline to a 0.4 percent gain.

Looking at details, commercial aircraft orders surged more than 200 percent, which again is an anomaly, though in a sign of weakness out of transportation, orders for motor vehicles fell 2.9 percent in the month. But this decline is probably not the beginning of a trend given still very strong vehicle sales.

Turning to capital goods industries, new orders for machinery jumped 1.6 percent with computer orders up 5.5 percent and communications equipment up 1.8 percent. Total year-on-year core orders are suddenly in the plus column, at 0.4 percent for the first positive reading since January. These gains speak to a rebound in expectations among businesses which perhaps are now looking for strength in the new year.

Among other readings, total shipments fell 1.0 percent in October which is not a good start to the fourth quarter with core capital goods shipments also lower, down 0.4 percent. Inventories do offer good news, down 0.2 percent amid concern that levels are too high right now. And relative to shipments, if not orders, inventories are too high with the inventory-to-shipments ratio jumping to 1.66 from 1.64. Unfilled orders, however, are positive, ending two months of decline with a 0.3 percent gain.

The order data in this report are very encouraging and follow strength in the manufacturing component of the industrial production report. Together they point to a year-end rebound underway for what had been, at least, an export-depressed factory sector. As far as a December rate hike, this report will offset, at least to a degree and perhaps to a large degree, the softness in this morning's PCE price data.

Market Consensus Before Announcement
Deep contractions in September and August are expected to be partially reversed with a 1.5 percent gain for durable goods orders in October which should get a not-quite-seasonable boost from Boeing orders at the biennial Dubai airshow. But even outside of transportation, forecasters see strength, at plus 0.4 percent which would also partially reverse prior weakness but again only partially. A special focus will be inventory readings in this report and whether they point to an unwanted and extended overhang tied to soft demand. Strength in the dollar, which has not at all abated, and resulting weakness in export demand has been tipping the factory sector into contraction all year.

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.