New Orders for Durable Goods dipped a slight 0.1% in August. That was slightly below the consensus expectations of an increase of 0.1%. The July numbers were revised slightly upwards. It was first reported as an increase of 4.0%, but now they say new orders rose 4.1%.
Given the volatile nature of the Durable Good series, the miss and the offsetting upward revision are just about irrelevant. The drop from last month is a bit more significant, but only a bit. While this is an important economic indicator, I don’t think it is telling a particularly significant story with this release.
Most of the drop from last month was due to the extremely volatile Transportation Equipment side. 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 777’s and 747’s 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.
While there was a big drop in the growth of orders for non-defense aircraft this month, the big swing was from the other big part of transportation equipment — motor vehicles. Excluding transportation equipment, new orders fell 0.1%, slightly better than expectations for a 0.2% decrease. Last month was revised downwards to a rise of 0.7% to from 0.8%. That pretty much offsets the slightly-better-than-expected number for August.
Overall, transportation equipment orders were down 0.3% in August. Non-defense aircraft orders rose 23.4%, but that was down from a 49.9% increase in July (revised from a rise of 43.4%). Orders for motor vehicles were down 8.5%, reversing most of July’s 10.2% gain. In June overall transportation orders were down 6.6%, and non-defense aircraft were down 24.0%.
Stripping Out Defense Is Useful
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). This month, it did not change the story very much, as orders excluding defense were also down 0.1%. In July, excluding defense, orders for durable goods were up 4.8% after falling 0.8% in June.
Orders for defense aircraft rose 22.5% after being up just 0.1% in July, but after a 20.5% decline in June. However, overall orders for defense capital goods (throw in things like tanks and ships) fell by 5.7%, on top of drops of 6.0% in July and a 3.0% 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. It 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. It 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. Business investment in equipment and software has been one of the few robust areas of growth in the economy. It looks like that will continue as core capital goods orders increased by 1.1% in August after falling by 0.2% in July, but after a 0.8% increase in June.
Business investment in equipment and software added 0.55 points of the 1.00 total growth in the second quarter, even though it is just 7.33% of the total GDP. In the first quarter, it was on balance responsible for more than the total growth of the economy, adding 0.60 points of the total 0.40 growth points. In other words, absent the increase in business investment in equipment and software, total growth in the economy would have been negative in the first quarter.
Aircraft Orders Uplifting
The rise in aircraft orders, both defense and non-defense, is good news not only for the big names like Boeing, and the big name suppliers like United Technologies (UTX) and Honeywell (HON), but also for thousands of much smaller sub-contractors as well. How long the bounce on the defense side will last is a very open question.
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. If we take a longer-term view, year-to-date defense aircraft orders are down 8.6% from the pace of the first eight months of 2010.
Mixed Results Elsewhere
The other areas of the economy were mixed. Orders for primary metals were off by 0.8%, but that is after a very strong 7.3% increase in July, and a slight 0.3% rise in June. Year to date, though, primary metal orders are up a very strong 23.8%. Thus I would not read too much into the slowdown there.
Fabricated metal products orders fell 0.5% on top of a 1.1% decline in July, but a 4.0% rise in June and are up 7.2% year to date. In other words, some softness — but not yet quite enough to lose sleep over.
There were some notable areas of strength as well in the report. Orders for computers (and related gear) rose by 5.5%, more than reversing July’s 7.3% decline. That brought the year-to-date increase to 10.9%.
Orders for communication equipment rebounded by 7.8%, but that comes after a 21.1% plunge in July. Year to date, that has been a very weak segment of the economy, with orders down 20.2%.
Orders for Machinery edged up 0.1% after a rise of 1.9% in July and are up 16.7% on a year-to-date basis. In other words, it has been a pretty good year so far for firms like Caterpillar (CAT).
Neutral, Flat Report
Overall this was a neutral report. We came in slightly worse than expected on a headline basis, but with the volatility of this series, the miss was not significant. If one excludes the transportation sector, it was slightly better than expected, but again not by enough to really mean anything.
There was a slight upward revision to last month. The level dropping to essentially unchanged on headline, and excluding both transportation and defense paints a picture of an economy that is more or less stalled. Not expanding, but not really contracting either. Given the history, that picture might get revised significantly when the numbers come out next month.
Taking a Longer View
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 eight months of 2010, things still look pretty good.
Overall, new orders are up 10.1%, and not a lot of difference if you strip out either transportation equipment (9.3%) or defense (11.5%). The key core capital goods area is also doing very nicely on a year-to-date basis, up 11.5%.
Defense capital goods orders, on the other hand, are down 9.6% on a year-to-date basis. Machinery orders have been a big part of the increase in core capital goods, rising 16.7% on a year-to-date basis.
If you look at the overall direction of change, things look pretty good. The graph below looks at the year-over-year change (not year-to-date), for the three key measures in this report: the headline, the excluding transportation number and the core capital goods number. The year-over-year change has come down from the start of the year, but that was mostly a function of the extreme weakness in the back-end of that year-over-year change.
The current level of year-over-year change is still better than what we have seen for most of the last twenty years. On the other hand, we are still recovering from an extremely deep and prolonged slump. We still have not returned to the pre-recession levels, so it is hard to get too excited.
However, we shouldn’t forget where we are coming from. If instead of looking at the year-over-year change, we look at the absolute levels of new orders, we still have a long way to go before we get back to the levels we saw before the Great Recession.
BOEING CO (BA): Free Stock Analysis Report
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UTD TECHS CORP (UTX): Free Stock Analysis Report
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