June Durable Goods: Tipping Point for the Tech Sector?

Jul.30.10 | About: Technology Select (XLK)

The advanced report for Durable Goods for June was released Wednesday and it contributed to a drop in the market that day. Indeed, headline numbers were disappointing (especially since this is supposed to be a manufacturing led recovery):

  • New orders for manufactured durable goods in June decreased $2.0 billion or 1.0 percent to $190.5 billion
  • Shipments of manufactured durable goods in June, down two consecutive months, decreased $0.7 billion or 0.3 percent to $195.0 billion. This followed a 0.7 percent May decrease.
  • Unfilled Orders. Unfilled orders for manufactured durable goods in June, down following two consecutive monthly increases, decreased $0.1 billion to $802.9 billion. This followed a 0.3 percent May increase.
  • Inventories. Inventories of manufactured durable goods in June, up six consecutive months, increased $2.8 billion or 0.9 percent to $308.2 billion. This followed a 1.1 percent May increase. Transportation equipment, up six consecutive months, had the largest increase, $0.8 billion or 1.1 percent to $80.0 billion.
  • Shipments for Computers and electronic products, down four of the last five months, had the largest decrease, $1.3 billion or 4.1 percent to $31.3 billion.

Since I usually focus on the tech sector, that last bullet point was rather alarming. Let's look at the charts and put that data point in context.

Shipments

Many analysts give less importance to Shipments since this is a backward looking measure reflecting orders that have been confirmed, manufactured and shipped. In other words, ancient history. The following chart shows how June shipments look for the overall tech sector:

That big decrease mentioned above is clearly visible in the last data point. It's a little surprising that, despite the drop in shipments, so many tech companies are showing improved earnings and are beating earnings expectations anyway.
New Orders

The forward looking measure that Wall Street gives the most credence to is the New Orders number. The following chart shows New Orders for the tech sector:

New Orders show a decline back to levels last seen in March of this year.

The outlook

First of all, there were a couple of positives in this month's Durable Goods report

  • Capital goods -- Nondefense new orders for capital goods in June decreased $1.1 billion or 1.6 percent to $64.1 billion. Shipments increased $0.6 billion or 1.0 percent to $63.2 billion. Unfilled orders increased $0.9 billion or 0.2 percent to $486.6 billion. Capital goods are generally considered to be a proxy for business investment and, though new orders declined the uptick in shipments and unfilled orders shows there's still life in the capital goods category and that businesses have not yet pulled back in their investing for growth.
  • With respect to the tech sector, we also see an a 0.3% increase in unfilled orders which at least suggests some continuing strength in the sector. Inventories increased 1.9% which, hopefully, is a sign that manufacturers are preparing for increased demand.

So we now have two months of declining shipments in the tech sector which more or less continues the pattern that has been in place for the last year. This most recent decline was sizable, however, and it makes the upcoming July numbers all the more important. Without an increase in July, the tech sector may be facing a change in trend - to the downside.

Luckily, the back-to-school shopping season is coming soon and that will provide increased demand for consumer technology products and the associated components that go into them. Back-to-school is of course followed by the holiday shopping season. So the seasonality is in favor of supporting demand for tech.

So for now, I have to say the trend for the tech sector remains up but the next couple of months will be crucial. Tech could be at a tipping point.