US Durable Goods Orders: strong headline and encouraging details

Today US durable goods orders report surprised to the upside with a 6.5% gain in June. Analysts from Wells Fargo, point out that the “eyepopping” gain was largely due to a surge in aircraft orders but they also see encouraging details in the report.

Key Quotes:

“The headline surge in durable goods orders was due largely to a more-than-doubling of civilian aircraft orders compared to the prior month. That is not to suggest that this was the only area of strength, but gains in other categories were smaller in comparison to the +131.2 percent pop in aircraft.”

“Orders for machinery as well as both primary and fabricated metals were all positive in June. Among major categories only electrical equipment and computers saw bookings decline in the month.”

“In terms of immediate implications for tomorrow’s preliminary estimate of second quarter GDP growth, the primary consideration in this report is not orders, but rather shipments. In particular, the key line to hone-in on is non-defense capital goods shipments excluding that big surge in aircraft. Here we see a 0.2 percent increase in June. That is a shade weaker than expectations, but it bears noting that the initially reported increase of 0.1 percent for the prior month (May) was revised to a 0.4 percent gain. In light of the better shipments figures, we acknowledge some upside risk to our forecast for a 3.5 percent rate of growth in equipment spending in tomorrow’s GDP report.”

“Durable goods inventories were a bit higher in June, climbing 0.4 percent on the month. While an inventory build is positive for GDP growth, stockpiling is not always good news for the economy. If the accumulation of inventories is in anticipation of a quickening demand environment (higher sales, increased orders) that is generally positive. If it is a result of product simply not moving because demand is drying up, that clearly is not a good signal. Given the late stage of the business cycle, it is not altogether clear which is the driving force in the 0.4 percent increase in June.”

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