Message From Today's Durable Goods Report: Time To Get Defensive

 |  Includes: ITA, IYT, IYZ, PPA
by: William Trent, CFA

The market being in a celebratory mood, little attention is being paid to such gloomy news as the durable goods report, which describes in rather bleak terms:

August durable goods new orders dropped a disappointing 0.5%. There was nothing in the breakdown of the data to provide contrary cheer. Every key category was soft.

So, in an attempt to find the silver lining and push the market over the critical hump so we can enjoy the champagne we have had on ice since January 2000, here are the durable goods categories that showed better growth in both shipments and new orders in August (all data sourced from the US Department of Commerce, on a non-seasonally adjusted year/year basis.)

The clear winner in today’s report was Defense Capital Goods, which saw nearly a 70% rise in new orders and a 10% rise in shipments. And while the trend does nothing to help our general sense of well-being, with inventory and backlog flat and a customer with good credit quality, the defense sector appears to be a good play in this environment.

defense cap goods

The runner-up for our affections is Communications Equipment, not traditionally a defensive play but perhaps so today due to how low the sector sunk and the high credit quality of its remaining customers. Those who deride Verizon’s (NYSE:VZ) capital spending may not appreciate that the company is one of the last threads on which the economy hangs. At any rate, their spending appears to be lending a helping hand to the environment for comm equipment manufacturers.

comm equip

In the “ehh, I guess we’ll take it” department is Transportation Equipment. New orders improved and turned positive, while shipments did just a bit better. Still, the inventory growth suggests that the industry is making too much stuff and will have to cut prices, production or both in the near future.


Finally, last but (unfortunately) not least comes Motor Vehicles and Parts. Orders and shipments for beleaguered Detroit were both down year/year. However, they were down less than they were in July. With inventory building up further, the industry may still be going to hell in a handbasket, but it will take longer to get there. That’s positive, isn’t it?


We now return to our previously scheduled celebration.

Editor's note: ETFs covering mentioned sectors are as follows: Defense - ITA, PPA; Telecommunications - IYZ, PTE; Transport - IYT.

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