June Durable Goods Orders Beat Forecasts... But Not If You Exclude Transportation

by: Doug Short

The July Advance Report on June Durable Goods was released yesterday morning by the Census Bureau. Here is the Bureau's summary on new orders:

New orders for manufactured durable goods in June increased $9.9 billion or 4.2 percent to $244.5 billion, the U.S. Census Bureau announced. This increase, up four of the last five months, followed a 5.2 percent May increase and was at the highest level since the series was first published on a NAICS basis in 1992. Excluding transportation, new orders increased slightly. Excluding defense, new orders increased 3.0 percent.

Transportation equipment, also up four of the last five months, led the increase, $9.9 billion or 12.8 percent to $87.1 billion. This was led by nondefense aircraft and parts, which increased $6.5 billion.
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The latest new orders number at 4.2 percent was well above the Investing.com forecast of 1.3 percent. Year-over-year new orders are up 10.9 percent, the highest YoY in 16 months.

However, if we exclude transportation, "core" durable goods were essentially flat MoM (up 0.03 percent to two decimal places) and 4.9 percent YoY. Investing.com was looking for a 0.5% MoM increase.

If we exclude both transportation and defense, durable goods were down 2.2 percent MoM but up 8.1 percent YoY.

The first chart is an overlay of durable goods new orders and the S&P 500. We see an obvious correlation between the two, especially over the past decade, with the market, not surprisingly, as the more volatile of the two.

An overlay with unemployment (inverted) also shows some correlation. We saw unemployment begin to deteriorate prior to the peak in durable goods orders that closely coincided with the onset of the Great Recession, but the unemployment recovery tended to lag the advance durable goods orders.

Here is an overlay with GDP — another comparison I like to watch closely.

The next chart shows the percent change in orders with and without transportation since the turn of the century.

Now let's exclude defense orders.

And finally, let's look at core durable goods orders, excluding both Transportation and Defense.

In theory the durable goods orders series should be one of the more important indicators of the economy's health. But its volatility and susceptibility to major revisions of the previous monthly data suggest caution in taking the data for any particular month too seriously.