September durable goods orders rose 2.2 percent on the heels of a 2.0 percent gain in August. Core capital goods orders and shipments are both rising at the fastest three-month average annualized pace in years.
Core Orders, Shipments Show More Steady Growth
Preliminary data on durable goods orders in the United States showed a continued firming in factory sector data to end the third quarter. Durable goods orders rose 2.2 percent in September, boosted by another doubledigit jump in the volatile civilian aircraft component. Communications equipment also posted a suspiciously large gain, so there may have been some additional noise generated by the recent release of the new iPhone (top chart).
Economic data for August and September have been impacted to varying degrees by the dual-impact from hurricanes Harvey and Irma. In the durable goods series, one area where we were watching for a hurricane impact was the vehicle orders component. New orders for vehicles & parts rose a scant 0.1 percent in September. Although this data is still fairly preliminary, this early signal suggests that storm replacement demand may not be enough to reignite autos production given the high levels of inventories and slower trend in the pace of sales.
Non-defense capital goods orders ex-aircraft, our preferred gauge of future business investment, rose 1.3 percent in September, the third consecutive monthly gain of that size. This string of strong prints puts the three-month average annualized rate at 11.6 percent, the fastest pace of growth since the eve of the steep decline in the price of oil in September 2014 (middle chart). Earlier this month, the ISM manufacturing index touched a cycle-high, and a chunk of this gain was clearly attributable to hurricane-related quirks. Given today’s strong print for core capital goods orders, however, the improvement in the survey-data likely also reflect stronger underlying fundamentals in addition to the hurricane-related noise.
Non-defense capital goods shipments ex-aircraft, which offers a snapshot of current conditions, also posted a strong reading of 0.7 percent in September. The string of gains brings the three-month average annualized gain for core capital goods shipments to 10.6 percent, the fastest pace since October 2014. Taken together, the core capital goods orders/shipments data bode well for a possible upside surprise to equipment spending in Q3 and continued momentum in Q4 (bottom chart).
With three-quarters of the year in the books, the recovery in the factory sector that has taken place in 2017 has built momentum in the second half of the year. The strong dollar/weak global growth/falling commodity price story that characterized the past two years has reversed in 2017, turning these headwinds into tailwinds for the sector. Manufacturers have responded by increasing payrolls by 104,000 jobs this year. Given the possible noise in the data from hurricanes and other factors, however, we will be watching future releases particularly closely.
