The 6.5 percent pop in durable goods orders in June handily surpassed consensus expectations. While the eyepopping gain was largely due to a surge in aircraft orders, the details were encouraging as well.
Even After Backing Out Aircraft, a Solid Report
The headline surge in durable goods orders was due largely to a more-thandoubling of civilian aircraft orders compared to the prior month. That is not to suggest that this was the only area of strength, but gains in other categories were smaller in comparison to the +131.2 percent pop in aircraft. Orders for machinery as well as both primary and fabricated metals were all positive in June. Among major categories only electrical equipment and computers saw bookings decline in the month.
In terms of immediate implications for tomorrow’s preliminary estimate of second quarter GDP growth, the primary consideration in this report is not orders, but rather shipments. In particular, the key line to hone-in on is non-defense capital goods shipments excluding that big surge in aircraft. Here we see a 0.2 percent increase in June. That is a shade weaker than expectations, but it bears noting that the initially reported increase of 0.1 percent for the prior month (May) was revised to a 0.4 percent gain. In light of the better shipments figures, we acknowledge some upside risk to our forecast for a 3.5 percent rate of growth in equipment spending in tomorrow’s GDP report.
Orders lead shipments, so the fact that core capital goods orders were down 0.1 percent in June is mildly concerning. However, the silver lining is that revisions to the prior month’s figures were to the upside here as well. An initial estimate of a 0.2 percent rise in May core capital goods orders was lifted to a 0.7 percent increase. Another observation that alleviates the concern about the modest slip in core capital goods orders in June is the fact that the new orders component of the ISM report jumped four points to 63.5 in June, and the new orders components in the latest prints for the regional Fed surveys (Empire, Philly, Richmond and Dallas) were firmly in expansion territory as well.
Is the Inventory Build Good News or Bad News?
Durable goods inventories were a bit higher in June, climbing 0.4 percent on the month. While an inventory build is positive for GDP growth, stockpiling is not always good news for the economy. If the accumulation of inventories is in anticipation of a quickening demand environment (higher sales, increased orders) that is generally positive. If it is a result of product simply not moving because demand is drying up, that clearly is not a good signal. Given the late stage of the business cycle, it is not altogether clear which is the driving force in the 0.4 percent increase in June.
While it is not a perfect litmus test, one time-tested way of determining the difference is to look at inventories as a share of shipments. As the bottom chart shows, this series will tend to rise in the lead-up to recessions, and that is clearly not what is going on at present.