New Orders for Durable Goods rose 4.0% in July. That was well above consensus expectations of an increase of 1.9%. In addition, the June numbers were revised upwards. It was first reported as a decrease of 2.1%, but now they say new orders fell just 1.3%.
Durable goods orders are a volatile series, and it is not uncommon for a big drop in one month to be followed by a rise the next — more common than two months in the same direction, and three or four months in a row is rare. Still, these numbers are good news, and argue strongly that we are not about to fall back into a recession.
Jumbo Jets Create Jumbo Swings
Part of the story was the extremely volatile Transportation Equipment side, and more specifically, from the Non-Defense Aircraft component, which is often the case when we get an unusually good (or bad) headline durable goods number. That is mostly orders for big 777s and 747s from Boeing (BA), which are very expensive items. It also includes orders for business jets from firms like Textron (TXT).
A few orders for new jumbo jets can really skew the numbers for the month. It was part of the story, but not all of it, as even without them the numbers were solid. Excluding transportation equipment, new orders rose 0.7%, well above expectations for a 0.1% decrease. Last month was revised upwards to a rise of 0.6% to from 0.1%.
Overall, transportation equipment orders were up 14.6% in July, and non-defense aircraft orders were soared 43.4%. In June, overall transportation orders were down 6.7%, and non-defense aircraft were down 24.0%.
If one want to gauge how much demand for long lasting goods is coming from the private sector, then one needs to strip out orders from the Pentagon (although it still counts civilian orders from the government). Falling defense orders tempered the overall increase.
Excluding defense, orders for durable goods up 4.8% after falling 0.9% (revised from -1.89%) in June. Orders for defense aircraft fell 6.1% on top of a 20.5% decline in June. Overall orders for defense capital goods (throw in orders for tanks and ships, etc.) fell by 7.8% on top of a 3.3% decline in June.
Core Capital Goods
One of the most significant details of this report is what is known as “core capital goods.” Those are orders for non-defense capital goods, excluding aircraft. That is a very good proxy for what businesses are investing in equipment and software.
That investment is a direct input into the GDP growth calculations, and one of the real bright spots for the economy in this recovery. That is the sort of spending that is a bet on the economic future of the country, and is also one of the areas that trends to swing with overall economic conditions. Those swings are a big factor in determining if the economy is growing or shrinking.
On that front, the news so far this year had been one of steady improvement, but June put a scare into the market. In June they were originally reported as a decline of 0.4%. That got revised away to an increase of 0.6%. However, it is now the July numbers that look soft, with a drop of 1.5%.
Business investment in equipment and software has been one of the bright spots in the recovery, adding 0.41 points of the 1.30 total growth in the economy, even though it is just 7.33% of the total GDP. The upward revision to June should mean that its contribution is greater when the revised GDP figures come out on Friday. If not revised away, though, the July decline would indicate a smaller contribution (or perhaps even a drag, but too early to tell) in the third quarter.
The non-defense aircraft segment was the strongest part of this report, but that is not particularly unusual. Those numbers are volatile in the extreme. This month they rose 43.4%. In June they plunged 24.0% (revised from down 28.9%). In May they posted a jump of 31.4%.
Those numbers are tame relative to an eye-popping 5,558.2% increase in January. That is not a typo, but a reflection of a total collapse of such orders in December (down over 95%). Did I mention that non-defense aircraft orders can be very volatile? Given recent announcements by Boeing, look for more increases in that segment in August.
The rise in orders is good news not only for the big names like Boeing, and the big name suppliers like United Technologies (UTX) and Honeywell (HON), but eventually it is bad news for thousands of much smaller sub-contractors as well.
The defense side of Aerospace fell sharply. Orders for defense aircraft dropped by 6.4% after they fell by 20.4% in June. If the country is going to make any progress on bringing down the deficit, defense spending is going to have to be on the table, and that probably means very little growth in spending on new planes and helicopters.
Motor Vehicles Chugging Along
The other notable area of strength was in orders for motor vehicles, which rose by 11.5% after an increase of just 0.1% in June. This is more evidence that the supply chain disruptions from the Japanese disaster are dissipating. Orders for Primary Metals were also very strong, posting a 10.3% rise after just a 0.2% rise in June.
There were some notable areas of weakness as well in the report. Orders for computers (and related gear) fell by 7.4%. Last month they were up by 1.9% (revised from down 0.8%). Orders for communication equipment plunged by 24.8% more than reversing June’s jump of 15.8% (revised from up 15.2%), which in turn came on top of a rise of 8.55 in May. Orders for Machinery also fell, dropping 1.5% after a drop of 1.85 in June (revised from a 2.3%. decline).
Better than Expected Report
Overall this was a very good report. We came in better than expected, but mostly due to the volatile non-defense aircraft area. Even excluding those, it was encouraging.
However, don’t get too carried away about it as the gains were narrowly based, mostly coming from the auto industry, and primary metals, and cars and trucks use a lot of those primary metals. The recovery from the tsunami is a one-time event and should not be extrapolated too much further. Keep in mind is that this is a very volatile number, and big increases in one month can to be followed by decreases the next. There is, of course, no guarantee that that will happen in August.
Given the month-to-month volatility in the numbers, it can be useful to step back and look at the longer-term numbers. If we look at new orders year-to-date, relative to the first seven months of 2010, things still look pretty good. Overall, new orders are up 9.4%, and not a lot of difference if you strip out either transportation equipment (9.2%) or defense (10.8%).
The key core capital goods area is also doing very nicely on a year to date basis, up 11.8%. Defense capital goods orders on the other hand are down 9.3% on a year-to-date basis. Machinery orders have been a big part of the increase in core capital goods, rising 15.8% on a year-to-date basis.
The rise in July was disturbing, but it comes after a disturbing June. After the revisions, though, June was not as bad as we had thought. The longer-term picture is still solid, but is fading. The graph shows the year-over-year change in total new durable goods orders, core capital goods orders and new orders excluding transportation equipment. Unfortunately, the St. Louis Fed has not yet updated its database for the July numbers (they should by the end of today), but it still shows a pretty solid year-over-year numbers, but fading from extraordinary gains late last year and early this year.
BOEING CO (BA): Free Stock Analysis Report
HONEYWELL INTL (HON): Free Stock Analysis Report
TEXTRON INC (TXT): Free Stock Analysis Report
UTD TECHS CORP (UTX): Free Stock Analysis Report
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