Durable Goods Orders: More Evidence of Near-Term Weakness in the Economy

by: The Angry Bear

By Rebecca Wilder

They keep calling it a soft patch, but when's the data going to show otherwise? This soft patch is persistent, and durable goods orders confirm it into Q2 2011.

Note: The "all manufacturing'" orders Y/Y growth rate are available through March only in Datastream for the chart above; the nondefense capital goods ex aircraft orders are current through Aptil.

From the Census April preliminary release on durable goods orders and shipments:

New orders for manufactured durable goods in April decreased $7.1 billion or 3.6 percent to $189.9 billion, the U.S. Census Bureau announced today. This decrease, down two of the last three months, followed a 4.4 percent March increase. Excluding transportation, new orders decreased 1.5 percent. Excluding defense, new orders decreased 3.6 percent.

We know that the auto industrial production print was influenced by the supply chain disruptions stemming from the Japanese earthquake. This probably affected the durable goods orders and shipments as well. Furthermore, the big monthly drop was driven (partially) by a large 30% decline in nondefense aircraft and parts orders over the month.

But the gist of the report, in my view, was disappointing. Total durable goods shipments fell 1% over the month, while new orders plummeted 3.6%. This is a very volatile series, and the March growth in new orders was revised upward to 4.4% over the month from 2.5%; but the average growth rate in core orders is showing holes.

Core durable goods orders, non-defense capital goods excluding aircraft -- a leading indicator of domestic investment spending on equipment and software -- fell 2.6% over the month. Volatile, yes -- but the real core goods orders turned negative, -0.33% on a three-month average growth basis, furthering a downward trend that's been in place since January. The April figure was down 0.2% on a real basis compared to the January-March 2011 average -- not a good start to Q2 2011. (The real series is constructed using the CPI durable goods deflator.)

The contributions to Q1 2011 fixed investment spending demonstrate that the entirety of fixed investment growth came from equipment and software, 0.8% quarterly contribution. (On data, you can view the contributions data in Table 2 of the release here or download the data for the entire report here.)

So when will this soft patch end? Neil Soss today tells me that 2H 2011 will be quite the kicker, as the temporary supply chain disruptions to industrial activity wear off. We'll see. It's going to take quite a bit of growth in 2H 2011 to get the US back on track to the consensus 2011 growth forecast of 2.7% (according to Consensus Economics May report).