New orders for durable goods are up 1.7 percent in May from April after a small upward revision to up 1.2 percent in April from March. The increase is well above the consensus of down 1.0 percent in the Econoday survey of forecasters. The surprise gain reflects broad-based gains that include a 32.5 percent increase in orders for nondefense aircraft and parts and a 2.2 percent rise for motor vehicles and parts, although defense aircraft and parts orders are down 35.4 percent. Excluding transportation, new orders for durable goods are up 0.6 percent month-over-month in May after a dip of 0.6 percent in April.

Overall new orders for durable goods have now been higher for a third straight month. The main driver has been orders in the transportation sector. Nonetheless, three months of increases is a welcome development as manufacturing has faced slower orders during a period of below trend growth. There was also an increase in order backlogs of 0.8 percent in May from April which suggests that manufacturers will have orders in the pipeline to support activity in the near term.

New orders for primary metals are up 0.5 percent in May from April while fabricated metals are flat compared to the prior month. Machinery orders are up 1.0 percent in May. Overall computers and electronic products are up 0.3 percent in May, although orders for computers and related products are down 2.3 percent. Orders for electrical equipment are up 1.7 percent in May from April. Overall transportation orders are up 3.9 percent.

The so-called"core" orders for capital goods excluding nondefense capital goods and aircraft is up 0.7 percent in May after a rise of 0.6 percent in April.

Forecasters see durable goods orders falling 1.0 percent in May after April's 1.1 percent rise. Ex-transportation orders are seen unchanged with core capital goods orders, after jumping 1.3 percent in April, rising a further 0.6 percent.

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.

Importance
Durable goods orders are a leading indicator of industrial production and capital spending.

Interpretation
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.