Durable Goods Fall More Than Expected in May

May durable goods orders fell -2.8% MoM (consensus -1%), but does follow a revision higher for April from +.6% MoM to +1.1% MoM. This is the first decline in durable goods orders following three months of increases. Excluding the volatile transportation category, new orders fell -1% MoM (consensus +.2%), but the April figure was revised up a full point to +2.5%. Versus a year ago, new durable goods orders are up a slight +.3% YoY, and ex-transportation orders have fallen -1.1% YoY. Ex-defense, orders are down a smaller -.2% YoY.

As expected, the decline in Boeing Aircraft sales of -22.7% MoM was a substantial drag. Total transportation orders fell -6.8% MoM in May following a -1.8% MoM decline in April. Metals and electrical equipment were also negative contributors, each declining close to 4% MoM. Defense spending was the largest growth category in May, rising +6.7% MoM (+20% YoY). Improvement was also seen in vehicles and parts (+2.3% MoM) and computers (+1.8% MoM).

Capital goods non-defense new orders fell a substantial -8.3% MoM, and are now up only +1.4% YoY. This was the largest decline in this category since January, when the economy was in the depths of the inventory correction cycle. Non-defense capital goods excluding the volatile aircraft category fell -3% MoM. This figure is used to judge demand for future business investment, and will be a disappointment to observers, especially as it takes away almost half the bounce in the category during March and April. Shipments of this category are used for calculating GDP. Shipments fell -.2% MoM in May after rising +.9% MoM in April.

Shipments rose for the third month in a row, increasing +.4% MoM (+.2% YoY), with transportation shipments fueling the gain. Non-defense capital goods shipments excluding aircraft fell -.2% MoM (-1.8% YoY).

Unfilled orders rose +.8% MoM (+19.9% YoY), continuing an almost unbroken two year string of increases bringing the category to a record high. Backlogs of aircraft production are responsible for the majority of the gains. Non-defense capital goods unfilled orders are up an even sharper +1.6% MoM and +31% YoY.

Inventories rose +.2% MoM (+6.4% YoY), and the inventory to sales ratio held steady at 1.46, the lowest level since January. Manufacturing inventories have risen for 15 straight months and are also at record high levels. Transportation equipment inventory gains have been rising steadily since last fall.

May's fall in durable goods orders casts in doubt the rebound seen in manufacturing indicators. The housing slump appears to continuing to dampen demand for goods lasting multiple years. If businesses don't accelerate capital goods demand soon, it raises concerns about the economic health of the economy for the balance of this year. Demand for machinery equipment fell -1.6% MoM, though it had been expected to rebound this month after declining -1.2% MoM in April. Today's data suggests that estimates for second quarter GDP will be revised lower by up to .4%, especially if consumer spending doesn't improve. It should be noted that durable goods data tends to be more volatile than other economic indicators due to the high volatility of transportation orders, but the other components of today's release were also weaker than expected.