U.S.: Orders Plunge in August, Details Less Discouraging

• New durable goods orders dropped a big 2.4% M/M in August, following the 4.8% M/M gain the month before.
• Excluding transportation, orders were flat on the month, while core orders dropped a modest 0.4% M/M.
• Despite the disappointing headline print, we are somewhat encouraged by the more modest decline in core goods orders.

U.S. durable goods orders declined by a worse than expected 2.4% M/M in August, following the 4.8% M/M gain the month before. This was below the market consensus for a 0.4% M/M gain and our own more optimistic call for a 1.5% M/M rise. Excluding transportation, orders were flat, while core capital goods declined by 0.4% M/M. The 3-month annualised trend in core orders remains quite encouraging, rising from 14.7% to 19.2%. On a year ago basis, new orders have declined 19.1%, while core orders are down 20.0% Y/Y.

The details of the report, however, were slightly less distressing than the headline print. Indeed, the key driver for the sharp drop in total durable goods orders was the 9.3% M/M drop in transportation orders, caused by the 42.2% M/M plunge in the volatile nondefense aircraft component, while orders for computers (down 0.7% M/M) and electrical equipment (down 0.5% M/M) were modestly lower. On the other hand, there was some meaningful growth in orders for primary metals (up 1.9% M/M), machinery (up 0.7% M/M) and fabricated metals (up 0.8% M/M). These are the basic building blocks for an eventual economic recovery.

The inventories to shipments ratio remained flat at 1.8. On the whole, we are inclined to be slightly more optimistic on the state of U.S. capital expenditures than the dire headline print from the durable goods report would suggest. Indeed, while the volatile transportation goods orders component continues to drive the headline number in recent months, we remain convinced that the underlying tone of core capital expenditures by U.S. businesses remains fairly positive.

TD Bank Financial Group

The information contained in this report has been prepared for the information of our customers by TD Bank Financial Group. The information has been drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does TD Bank Financial Group assume any responsibility or liability.