Strong U.S. Durable Orders Bode Well for Investment Spending Growth

Durable goods new orders put in a strong display in July, rising 1.3% compared to expectations for a flat reading. As well, the increase in June was revised up to 1.3% from an initially estimated gain of 0.8%.

The strength in July was led by non-defence aircraft and parts, which soared 28%. However, a number of other sectors contributed to the increase as well, with general machinery up 4.6%, communications equipment up 2.9% and the primary metal component up 2.2%. Motor vehicle and parts production continues to benefit from the ending of a strike at a key auto parts producer, although weak auto demand limited the rise in July to only 1.2%. A reflection of this broad-based strength was evident in a strong 2.6% rise in core orders (non-defence capital goods new orders excluding aircraft) that built on a solid 1.3% gain in June.

Today's report also showed overall shipments up a very robust 2.5% in July following a 0.9% gain in June. July inventories soared 0.8% matching a similar-sized increase in the previous month.

Solid gains in both overall and core new orders bode well for a return to positive growth for investment spending on equipment and software after a 3.4% drop in the second quarter. As well, the gain in inventories of durable goods is consistent with expectations that overall business inventories will add to GDP growth in the third quarter.

These areas of strength will help partially offset the downturn in consumer spending on motor vehicles expected in the quarter and the ongoing weakness in housing. Nevertheless, overall GDP growth is expected to be modest in the third quarter and the Fed will be wary about activity weakening further going into the final quarter of the year. This is expected to keep Fed funds unchanged at the current modestly stimulative 2% through the end of this year and into 2009.

RBC Financial Group
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The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.