US: Durable Goods Orders

Fri May 25 07:30:00 CDT 2018

Consensus Consensus Range Actual Previous Revised
New Orders - M/M change -1.2% -2.5% to 1.7% -1.7% 2.6% 2.7%
Ex-transportation - M/M 0.6% -0.2% to 1.2% 0.9% 0.0% 0.4%
Core capital goods - M/M change 0.7% 0.1% to 1.4% 1.0% -0.1% -0.9%

Tariff-related price inflation may be driving up dollar totals in the factory sector which, based on the April advance durable goods report, has gotten off to a very strong start for the second quarter. Forget the 1.7 percent headline decline in the month, one due entirely to an understandable swing lower for what have been very strong aircraft orders. Excluding aircraft and other transportation equipment, durable goods orders rose 0.9 percent to beat Econoday's consensus by 3 tenths.

Orders for primary metals, where tariffs on steel and aluminum are in effect, jumped 1.3 percent in April on top of March's giant 4.6 percent surge when tariffs first took effect. Orders for fabricated metals, also affected by tariffs, rose 2.0 percent following March's 1.2 percent gain. These two components make up more than 20 percent of total durable orders.

Elsewhere, capital goods put in a very strong April showing in what is very auspicious news for second-quarter business investment. Core orders, which exclude aircraft, rose 1.0 percent with core shipments, which are direct inputs into fixed nonresidential investment, up 0.8 percent.

Civilian aircraft orders fell by 36.2 percent but follow March's 71.7 percent climb. And defense aircraft helped narrow the difference, rising 7.5 percent in the month. Vehicle orders also opened up the second-quarter on a strong note with a 1.8 percent gain.

The factory sector, as has been indicated by the regional reports, is picking up steam and, showing no immediate negatives and possibly positives from tariffs, looks to be an increasing contributor to the 2018 economy. Other details include a third straight strong rise in unfilled orders, up 0.5 percent in April, and a useful 0.3 percent build for inventories.

Market Consensus Before Announcement
Underlying strength is the call for durable goods orders which, however, is not expected to be evident at the headline level where a 1.2 percent decline is Econoday's consensus, one reflecting expectations that aircraft orders, which have been very strong, will finally pull back. Ex-transportation orders, which exclude aircraft, were flat in March and solid improvement is the call for April, at a consensus gain of 0.6 percent. A decline in core capital goods was a disappointment in the March report and a 0.7 percent rebound is the April consensus.

Durable goods orders are new orders placed with domestic manufacturers for factory hard goods. The report also contains information on shipments, unfilled orders and inventories. The advance release provides early estimates and is revised about a week later by the factory orders report.

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.