Orders for capital goods are not looking strong in a major headline from the durable goods report that may well lead to downgrades for business investment. Core capital goods (nondefense ex-aircraft) fell a steep 0.6 percent on the month in May for the second decline in the last three months and far below Econoday's consensus for a 0.1 percent gain. Year-over-year, core orders are now in the negative column at minus 0.2 percent.

Total durable orders edged 0.1 percent higher on the month versus Econoday's for no change while ex-transportation orders fell 0.1 percent which is below the consensus for a 0.1 percent gain. Total shipments fell 0.3 percent, though this follows April's 1.2 percent jump, while both unfilled orders and total inventories are modest positives in the report, up 0.2 and 0.3 percent respectively.

Details on new orders include monthly declines for machinery of 0.5 percent, for communications equipment of 1.6 percent, and electrical equipment of 0.4 percent. All these are inputs into core capital goods. Computers, another input, managed only a 0.1 percent gain.

Transportation details include a 0.7 percent rise for motor vehicles to extend this category's run of gains and a comparatively subdued 2.8 percent decline for commercial aircraft where monthly data are often highly volatile. Defense aircraft are a positive in the report, jumping 22.6 percent on the month.

Total new orders are up on the year, but not by much at only a nominal 0.8 percent which is below the rate of inflation. There have been signs of life coming from the manufacturing sector but they don't include this report which may have forecasters calling for another sub-50 score for the ISM manufacturing report on July 1.

Forecasters see durable goods orders unchanged in May following a solid 0.6 percent rise in April. Ex-transportation orders are seen up 0.1 percent as are core capital goods orders.

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.