US: Durable Goods Orders

Thu Apr 26 07:30:00 CDT 2018

Consensus Consensus Range Actual Previous Revised
New Orders - M/M change 1.7% 0.1% to 4.0% 2.6% 3.1% 3.5%
Ex-transportation - M/M 0.5% 0.2% to 1.0% 0.0% 1.2% 0.9%
Core capital goods - M/M change 0.6% 0.2% to 1.0% -0.1% 1.8% 0.9%

Aircraft often skews the durable goods report and March is a fine example. New orders for civilian aircraft have been very strong and were once again so in March, at a monthly 44.5 percent gain on top of February's 39.1 percent surge. These gains are what's behind the strong overall headlines of the past two reports, at 2.6 percent in March and an upwardly revised 3.5 percent in February.

Excluding transportation equipment, however, durable goods orders came in unchanged which is sizably below Econoday's consensus for a 0.5 percent gain. Note that vehicle orders, which like aircraft are part of the transportation group, were flat and not a factor in the month.

What is a key factor in the month is weakness in machinery which is at the heart of the capital goods sector and where new orders fell 1.7 percent. Orders for computers were also down while orders for electrical equipment were flat. These are all inputs into the core capital goods group where orders slipped 0.1 percent, again well under expectations for a 0.6 percent rise. Shipments for this reading, which are an input into GDP business investment, fell 0.1 percent with shipments in the prior month revised down 5 tenths to a 0.9 percent gain. These latter results will lower estimates a bit for tomorrow's GDP report.

Tariffs on steel and aluminum, which took effect late in the reporting month, didn't affect March's data. New orders for primary metals were strong, at 1.3 percent, but under February's unusual jump of 4.3 percent. Inventories of primary metals show no special sign of stockpiling, rising 0.5 percent following builds of 0.4 and 0.6 percent in the prior two months.

There's weakness below the headline in this report but the pace for the factory sector is still solid. Year-on-year order rates are still in the mid-to-high single digits for a sector that looks to contribute strongly to the 2018 economy.

Market Consensus Before Announcement
Giveback is not the expectation for durable goods orders which are expected to rise 1.7 percent in March following significant and broad-based strength in February. The consensus for ex-transportation orders is a 0.5 percent increase with core capital goods expected to rise 0.6 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. 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.