US: Durable Goods Orders

Wed Sep 27 07:30:00 CDT 2017

Consensus Consensus Range Actual Previous Revised
New Orders - M/M change 1.5% 0.4% to 3.5% 1.7% -6.8%
Ex-transportation - M/M 0.4% -0.2% to 0.7% 0.2% 0.5% 0.8%
Core capital goods - M/M change 0.3% 0.3% to 0.5% 0.9% 0.4% 1.1%
New Orders - Yr/Yr Change 5.1% 4.2% 4.0%
Ex-transportation - Yr/Yr 6.1% 5.6% 5.8%
Core capital goods - Yr/Yr 3.6% 3.5% 4.1%

A second straight jump in capital goods leads what is a mostly very strong durable goods report where the August headline rose 1.7 percent. This is only slightly above expectations but not core capital goods (nondefense ex-aircraft) which jumped 0.9 percent vs Econoday's consensus for a 0.3 percent gain. This together with a second straight jump in shipments of core capital goods, up 0.7 percent in August, point to business confidence and strengthening business investment and will significantly lift estimates for second-half nonresidential investment.

The headline gain reflects a monthly upswing in civilian aircraft orders, up 45 percent in August following a drop of 71 percent and a surge of 129 percent in the prior two months. Excluding transportation, the report's strength fades, up only 0.2 percent which is half the expected gain. Weakness here is in defense capital goods which fell 9.4 percent but following July's 15.3 percent jump. Other declines include fabricated metals (down 0.4 percent), computers (down 2.3 percent), and electrical equipment (down 0.1 percent).

But there's more good news than bad news including motor vehicles which had been weakening but now show a 1.5 percent August gain for orders and a 1.9 percent rise in shipments. Communications equipment also jumped with orders up 4.0 percent. Other readings include a moderate 0.3 percent rise for both total shipments and inventories that keeps the inventory-to-shipments ratio steady at a lean and constructive 1.69. Unfilled orders did not show improvement, unchanged following July's 0.3 percent decline.

The factory sector did not show any initial effects from Hurricane Harvey's late August hit and, assuming Hurricane Irma's effects proves as slight in September, appears poised for solid year-end acceleration centered in capital goods. The one missing piece in the factory sector, however, is manufacturing production as measured by the Federal Reserve which has remained stubbornly weak including a 0.3 percent fall in the report for August. Note that revisions in today's report are minor compared to the factory orders report when capital goods data from the July advance durables report were sharply upgraded.

Market Consensus Before Announcement
Strength for core capital goods, both in orders and shipments, has been the key highlight of recent durable goods reports where aircraft-distorted headlines have otherwise made the report hard to read. A negative in the report has been weakness in vehicle readings, one consistent with weakness in underlying consumer sales and very apparent in the separate monthly report on industrial production. August durable goods orders are seen bouncing back from July's 6.8 percent plunge with a 1.5 percent gain in August. Ex-transportation orders are expected to climb 0.4 percent on top of July's 0.5 percent gain while the call for core capital goods orders (nondefense ex-aircraft) is a gain of 0.3 percent following a 0.4 percent increase in July.

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. 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.