New Orders for Durable Goods fell 2.1% in June. That was well below the consensus expectations of an increase of 0.5%. In addition, the May numbers were revised downwards. It was first reported as an increase of 2.1%, but now they say new orders rose 1.9%.
Durable goods orders are a volatile series, and it is not uncommon for a big gain in one month to be followed by a decline the next; it is more common than two months in the same direction, and three or four months in a row is rare. Still, these numbers are bad news and indicate a slowing of the pace of recovery.
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 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.
This was part of the story, but not all of it. Excluding transportation equipment, new orders rose 0.1%, below expectations for a 0.5% increase. Last month was revised upwards from a rise of 0.6% to up 0.7%. Overall transportation equipment orders were down 8.5% in June, and non-defense Aircraft orders were down 28.9%. In May overall transportation orders were up 5.8% (unrevised), and non-defense aircraft were up 31.4% (revised from 36.5%).
If one wants 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 were also part of the story this month. Excluding Defense, orders for durable goods were down 1.8% after rising 1.5% (revised from 2.9%) in May.
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.
This 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 not this month. June reversed an encouraging May. Core capital goods orders fell by 0.4%. That is after a 1.7% rise in May, which was revised down from an original 2.6% drop.
Business investment in equipment and software has been one of the bright spots in the recovery. Its contribution to growth looks like it will be smaller in the second quarter, but still positive.
Weakest Section Also Most Volatile
The non-defense aircraft segment was the weakest part of this report, but that is not particularly unusual. Those numbers are volatile in the extreme. This month they fell 28.9%. In May they soared 31.4% (revised from 36.5%). In April they posted a drop of 29.0%. 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 a big increase in that segment in July.
The fall in orders is bad 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. However, American Airlines (AMR) just placed the largest jetliner order in history, so don’t get too concerned about this month’s drop.
Defense Spending
The Defense side of Aerospace also fell sharply. Orders for Defense aircraft dropped by 20.5% after they dipped by 13.4% in May (revised from up 5.5%). 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.
Overall Defense capital goods orders (including aircraft, but also tanks and ships and such) were down 3.9%, reversing a 7.5% rise in May (revised from a 3.9% increase).
Computers & Equipment
Orders for computers (and related gear) fell by 0.8%. Last month they were up by 1.8% (revised from up 1.3%). Orders for communications equipment parts soared by 15.2% on top of a 8.7% rise in May (revised from being up 3.6%). That, however, is after being very weak earlier in the year.
Even with the back-to-back big increases, on a year-to-date basis they are down 16.7% from the first half of 2010. Orders for Machinery also fell, dropping 2.3%. That more than reverses the gains of the last two months of 0.8% and 0.9% respectively.
Report Card: D
Overall this was a bad report. We came in worse than expected but mostly due to the volatile non-defense aircraft area, but even excluding those, it was disappointing. The weakness was very broad based. Yes the usual suspects for a bad number, aircraft and defense orders, were weak, but even if they are excluded, the numbers were anemic.
Keep in mind is that this is a very volatile number, and big decreases in one month can to be followed by increases the next. There is, of course, no guarantee that that will happen in July.
Longer-Term 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 in the first half of the year, relative to the first six 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 (10.7%).
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 8.6% on a year-to-date basis. Machinery orders have been a big part of the increase in core capital goods, rising 15.2% on a year-to-date basis.
The drop in June was disturbing, but it comes after a solid May. 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.
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