July durable goods orders more than reversed the aircraft-fueled surge of June amid continued weakness in the auto sector. Core capital goods orders, however, strengthened and bode well for Q3 equipment spending.
Transportation Troubles
Durable goods orders fell 6.8 percent in July, which was a bit worse than the 6.0 percent drop expected by consensus. We knew following last month’s 129 percent surge in nondefense aircraft orders that there would be payback in August. Sure enough, civilian aircraft orders tumbled 71 percent, dragging down the headline. Fortunately for aircraft manufacturers, orders for defense-related aircraft and parts rose 48 percent in July.
In addition to a pullback in nondefense aircraft, the transportation sector was held down by the continued soft patch in autos. Orders for new vehicles and parts fell 1.2 percent. Seasonal adjustment in the auto sector can be difficult this time of year given the changing pattern of summer shutdowns, but orders have now fallen in five of the first seven months of the year. Inventories at auto dealers have been piling up amid slower sales, so the pullback in orders and production is not terribly surprising.
Outside a volatile month for an already volatile part of the report, orders were stronger. Excluding transportation, orders came in a shade better than expected, increasing 0.5 percent.
Similarly, our preferred bellwether for equipment spending posted a healthy increase. Nondefense capital goods orders excluding aircraft rose 0.4 percent in July. Core orders are now rising at a three-month average annualized pace of 4.6 percent, the strongest clip since March.
When looking at shipments, equipment spending for the current quarter looks to be off to a solid start. Nondefense capital goods shipments rose 2.0 percent on top of a meaningful upward revision to June. The July shipments numbers combined with recent core orders suggest another positive quarter for equipment outlays. We currently expect equipment spending to rise about 6 percent in the current quarter.
Modest Build in Inventories Could Have Mammoth Impact in Q3
In a report published earlier this week "Inventories: The Tail That Wags the Dog in Q3?", we highlighted that it will only take a small move in inventories to have a big impact on the third quarter’s topline GDP figure. Today’s durables report supplies the first input data into the BEA’s estimates. Inventories rose 0.3 percent, bringing the three-month average annualized pace up to 3.6 percent.
While durable goods represent only a slice of nonfarm inventories (also included are wholesale, retail and nondurable manufactured goods), and this is only the first monthly reading of the quarter, today’s gain lends support to our call for inventory growth to pick up in the third quarter and boost headline GDP.
