Durable Goods Recovery Focused on Aircraft Demand

Total durable goods orders rose +1.4% MoM in June (consensus +1.9%), but this was offset by the reduction in May's decline to -2.3% MoM from the originally reported decrease of -2.8%. Most of the gain was tied to an increase in aircraft orders at Boeing (+29% MoM in June versus -21% MoM in May. +59% YoY), a normally volatile figure. Over the past year, new orders have fallen -1.3% YoY.

The more important issue today was the decline in durables excluding transportation which unexpectedly declined -.5% MoM (consensus +.6%). Ex-transportation orders have now fallen two months in a row, and raises concerns about the robustness of business investment, or capex. The good news here is that last month's decline in ex-transportation durable goods orders, for items meant to last several years, was revised to -.2% from -1% MoM. Versus a year ago, new orders ex-transportation have fallen -2.5% YoY. Transportation orders have risen +1.5% YoY, and they rose +6.1% MoM in June.

Capital goods orders +2.7% MoM while shipments fell -.5% MoM. Over the past year, capital goods orders have only risen +.3% YoY.

Non-defense capital goods orders excluding aircraft, which is viewed as a good proxy for future business investment, also fell again in June, declining -.7% MoM after falling an even larger -1.5% MoM in May. Shipments of this subgroup are used to calculate GDP, and they also fell in June, down -.4% MoM after rising +.7% MoM in May. Unfilled orders though grew +.7% MoM in June. The weakness in this category's growth in June is tied to lower demand for computers (-4.6% MoM), communications equipment, metals, and defense orders (-14% MoM). Ex-military demand grew 1.9% MoM in June after falling -2.7% MoM in May. The decline in defense spending still surprises (-38% YoY) me after many years of war. Isn't the government having to replace a lot of worn out and damaged equipment?

This report pulls into question the recent strength in manufacturing, and whether firms are investing in future growth. Weaker domestic consumer demand is being somewhat offset by rising export demand for U.S. durable goods. The decline in shipments (-1.1% MoM) after three months of gains is also something to watch as durable goods inventories rose a modest +.2% MoM. Factories appear to want to keep inventory growth contained after having to draw down excess inventories earlier this year. The good news is that unfilled orders are rising.

Second quarter GDP estimates are being left unchanged based on this data.

*****************

Jobless claims were lower than expected at 301k (310k consensus) and down slightly from last week's revised level of 303k.