Durable Goods Orders Reverse December Strength in January

Durable goods orders fell more than expected in January, declining -5.3% MoM (consensus -4%).  In addition, December's gain was revised down to +4.4% MoM from the originally reported increase of +5.2% MoM.  A large swing in aircraft orders(-31% MoM) is responsible for the majority of the change, though decreased demand for computers and communication equipment (-12% MoM) were also significant contributors.  Excluding transportation orders (-13% MoM), which are known to be very volatile from month to month, durable goods orders fell -1.6% MoM (consensus -1.4%), and December's ex-transportation figure was also revised lower to +2% from +2.6%.

 

Business investment is being watched closely as a good indicator of rising recession risks as companies cut back in the face of weakening business and consumer demand.  The best proxy for business investment is orders for non-defense capital goods excluding aircraft.  This category fell -1.4% MoM, the largest decline since October, and shipments rose +.1% MoM, a definite slowdown from the +1.7% pace of the prior month.

 

Capital goods orders declined by -9.6% MoM.  A 20% decline in military orders caused ex-defense equipment orders to fall -4.7% MoM, though defense shipments rose +11% MoM.  Non-defense capital goods orders fell -8.1% MoM.  Not all is bleak, as export orders remain strong on higher demand related to the cheapening dollar.

 

Overall, durable goods shipments rose +1.8% MoM, inventories rose +.6% MoM, and unfilled orders rose +.6% MoM.  The inventory to shipment ratio eased slightly to 1.5 from 1.51.

 

Over the past year, new durable goods orders rose +3% YoY, with ex-transportation and ex-defense both growing by 2.8% YoY.  Capital goods orders are up +13.3% YoY, with defense up only +3.9% YoY and non-defense capital goods orders rising +15% YoY.  Transportation orders are up +3.6% YoY.  All of the transportation gains are attributable to non-defense aircraft orders rising +84% YoY while auto and truck orders have fallen -7.6% YoY.  Machinery orders have grown an impressive +17% YoY.  Inventory growth continues, rising +3.9% YoY.

 

The January reversal basically offset the gains of December. Since this series is volatile, it is probably best to assume that demand has stagnated, rather than declined as we enter 2008.  But, weakness in business investment is an important indicator of an economy falling into recession.