Durable Goods Demand Softening

Durable goods orders fell more than expected in October, falling -.4% MoM (consensus -.1%). But the September decline was reduced to -1.4% from the -1.7% previously reported. Excluding transportation, durable goods orders followed a similar pattern with the October figure coming in much weaker than expected at -.7% MoM versus expectations for an increase of +.3%. In addition ex-transportation orders were revised up to +1.1% in September from an originally reported level of +.3% MoM.

The credit crunch is making it more difficult to find financing, which is combining with slower demand growth to cause businesses to reduce spending. Business appear to be more cautious in making capital expenditures until they see how the economy fairs with the recent credit squeeze and housing downturn. Expectations of a US recession are rising.

New durable goods orders fell for the third straight month, which is the first time that has happened in more than three years. Total capital goods orders fell -1.3% MoM. When looking at non-defense capital goods bookings, excluding the volatile aircraft category, which are viewed as a proxy for future business investment, we see they fell -2.3% MoM in October - the largest decline since February. Shipments of these items are used for computing GDP dropped -1.2% MoM in October. Demand for defense equipment rose 16%, and are likely to continue rising as old weapons systems are replaced. Due to a recent crash, all F-15 fighters in the US and Japan were recently taken off active duty due to concerns about their age and airworthiness. Non-defense new orders for capital goods in October decreased by 3.1% MoM.

Vehicles and parts orders fell -1.4% MoM and non-defense aircraft fell -5.2% MoM. Computer orders declined a substantial -8.4% MoM while machinery fell -1.7%. Areas seeing increasing orders were electrical equipment at+4.1% MoM and metals.

Total shipments rose +.6% MoM the first increase in three months, though capital goods shipments fell -.5% MoM, the first decline in four months. Unfilled orders continue to grow, increasing 1% MoM and 18.1% YoY - a bright spot in the durable goods report and another record high. The backlog is primarily due to unfilled transportation orders (Boeing airliners).

Inventories rose +.2% MoM and are up 2.1% YoY. Inventories have risen for 3 of the past 4 months, and are also at a record high since they began being tracked in 1992. Inventory to shipments slipped to 1.47 from 1.48 the prior month, but remain higher than the 1.42 low reached in July.

Over the past year, new orders have risen +3.1% YoY with capital goods orders up +2.6% YoY. Defense orders have risen 28.2% YoY. Vehicle and non-defense aircraft new orders have risen +2.6% YoY. Total durable goods shipments have risen +2.8% YoY, while capital goods shipments have risen a stronger +4% YoY.