December Durable Goods Orders Much Stronger than Expected

Durable goods orders rose +5.2% MoM (consensus +1.6%, prior revised higher to +.5%) in December. Ex-transportation orders, which tend to be volatile, were also much stronger than expected, rising +2.6% MoM (consensus +.1%, prior revised up to -.4%). Record aircraft sales were expected to boost sales, but other areas were expected to remain weak. It appears that export orders were much stronger than anticipated at the end of 2007. This was the best monthly gain since last July. Over the past year, new durable goods orders have risen +5% YoY, with ex-transportation rising +2.5% YoY and ex-defense increasing +3.1% YoY. Defense capital goods orders have risen a stunning +50% YoY as the war increases replacement demand. Capital goods orders rose a strong +11.2% MoM. Demand for non-defense capital goods excluding aircraft rose a solid +4.4% MoM, the best gain since last March. In fact this area stagnated during most of 2007, and is viewed as a good proxy for future business investment. Renewed strength in capital goods excluding defense and aircraft is an encouraging sign for future economic growth. Shipments of this same category rose +2% MoM, the largest rise since March 2006. The Fed will be glad to see that capital expenditure demand has not collapsed. Defense orders surged an unusually large 81% MoM, mainly due to increased aircraft orders. Ex-defense equipment orders rose +2.9% MoM, as machinery orders rose the most in a year. Computer and electronic orders remain robust at +4.6% MoM, but electrical equipment fell -1.4% MoM. Aircraft orders rose 11.7% MoM (+33% YoY), as overseas demand for airliners increased aircraft new books to 287 new orders in December versus 177 in November. Other vehicle sales fell -2.3% MoM, meaning that all of the +11.3% MoM gain in transportation orders was due to aircraft demand. Domestic demand showed continued signs of slowing. Orders for appliances and motor vehicles fell again in December. The most recent ISM manufacturing readings showed manufacturing contracting at the fastest pace in four years, and new orders falling the most since the 2001 recession. Shipments of durable goods fell -.1% MoM, and are down -.6% YoY. Capital goods defense shipments fell -4.9% MoM, and are down -2.2% YoY. Transportation shipments fell -1.4% MoM and -6.9% YoY, perhaps due to problems with the new Dreamliners at Boeing. Non-defense capital goods unfilled orders rose +2.8% MoM, while ex-aircraft only rose +.6% MoM. The large backlog of unfilled orders should help keep employment supported until demand is met. Inventories rose +1.1% MoM (+3.7% YoY) with non-defense capital goods inventories also rising +1.1% MoM, but +7% YoY. The inventory to shipments ratio popped back up to 1.51 from 1.42 last summer. The one major negative out of this report is that inventories have risen +3.7% YoY while shipments have slowed -.6% YoY. This data will cause fourth quarter GDP to be revised higher.