Investors celebrated the Durable Goods Orders data for the month of August on Wednesday, as non-defense capital goods orders excluding aircraft climbed 1.1%. The segment representing business investment had declined 0.2% in July and raised a red flag on the economy. Thus, this recovery was counter-relative and a relief to market participants, at least until stocks turned sour universally in the afternoon. There are important considerations that might dilute the punch of this data longer term if they prove true in the months ahead. I expose that risk for you here.
Critical Analysis Of The Data
The first thing I do when reviewing such a data-point is to note if there was a significant revision to the prior months’ data. A sharp revision lower to the prior month can serve to provide illusory growth in the reporting period. However, in this case, and at least for the headline data, the revisions seemed to be minor and served to discount this month’s growth anyhow (they were revisions higher). I could not locate the pre-revision number with regard to non-defense capital goods excluding transportation segment, but the potential impact here should be considered by the reader.
Durable goods new orders declined 0.1% on the whole, which was disappointing against the economists’ consensus forecast for 0.2% growth in August. Still, the decline followed July’s 4.1% growth (revised from 4.0%), so the volatility of these irregular high-ticket priced orders is better smoothed when reviewed over more than a month. When excluding transportation, new orders fell by the same 0.1% seen in the headline figure in August, though this time beating the economists’ consensus for a drop of 0.2%. In July, the ex-transportation count increased by 0.7% month-to-month. Excluding defense, new orders also fell by 0.1% in August, though following a 4.8% increase in July.
Shipments fell 0.2% in August, after rising 2.1% in July. Excluding transportation, shipments gained 1.2%, off a drop of 0.6% in July. Excluding defense, shipments fell 0.4% in August, after their 2.5% increase in July.
Let’s get right to the market moving news. Non-defense capital goods orders ex-transportation increased 1.1% in August, following the 0.2% decline in July. In June, these orders rose 0.8%. The result of this news has raised economic hope and lowered expectations of recession, at least for Q3. Macroeconomic Advisors raised its GDP forecast to an annual rate of 2.1% for the third quarter, up from 1.7% previously; several economists did the same, due to this data.
However, there’s one key risk overhanging these projection upgrades and also on investment decisions based on economic gain expectations. Outside of the specific companies benefiting, I am not sure there will be much profiting in America. I expect much of this growth is on exports, goods sold to the emerging world. For as long as there is robust growth in India, China, etc., this data-point will not prove a timely harbinger of economic strife in the United States. Also, let’s not forget that the U.S. manufacturing sector restructured significantly through the last recession, some through bankruptcy and some thanks to the government. Mostly, these improvements came on capacity contraction and union concessions. Thus, the manufacturing sector is more nimble today. And one should question how long the emerging world can sustain robust growth if U.S. consumption retrenches further and European consumers gather into a shell. Christine Lagarde warned of this in a recent address given during her American tour.
Industry Sector Breakdown
Not all industrials saw a stellar August, and that was reflected in the day’s trading of some of the shares through midday. However, since about 1:00 PM Wednesday, stocks started lower across the board, and at 3:15 PM ET or so, the decline accelerated. Growth was certainly celebrated early though in the Aerospace/Defense Industry, which according to Yahoo Finance was up 1.9% to 2.5%, depending on whether we’re talking about the major diversified companies or those listed in products and services. There was good reason for this, as the Durables Report showed a 22.5% increase in new orders. Still, Lockheed Martin (LMT), Rockwell Collins (COL) and Boeing (BA) ended down about 1% or so. The Dow was off 1.6%, to put this into relative perspective.
Computers and electronic products saw a 1.3% increase in new orders, and the shares of relative firms did well to start the day, but followed the general market track into the close. Of course, Amazon.com (AMZN), which maintained a gain of 2.5%, had a strong company specific driver. Sony (SNE) kept above water too, rising 0.6%, perhaps on the durables report. However, Apple (AAPL), which was firefighting against rumors and Amazon’s entry into the tablet market, declined 0.5% on the day. Dell (DELL), also in the news, fell about 1.9%. Microsoft (MSFT) was short just 0.4%, which again reflects relative outperformance against the broader indexes.
Manufacturing recorded a 0.7% increase in new orders, but the growth was specific to industry. Primary metals saw a 0.8% decline and fabricated metal products fell 0.5%. As a result, Arcelor Mittal (MT) shares dropped 3.7%. Communication equipment orders improved 7.8%, but the shares of Cisco Systems (CSCO) and Broadcom (BRCM) fell 1.4% and 2.9%, respectively. Motor vehicles and parts saw an 8.5% drop, and the shares of Ford (F) and GM (GM) fell 1.9% and 3.7%, respectively.
Another important sub-metric found in the durables report is the data on unfilled orders, which were up 0.9% for the second consecutive month. Some of these orders may prove to be in error, and when considering the dollar figures involved (a $7.6 billion increase in August), it’s worth noting. For the most part, this data is viewed as a positive, as it represents business in process. Inventory reached record levels (most since 1992), but this has a lot to do with population growth and emerging market development over time. Markets have grown and so have inventories. Still, excess ordering and fat inventories can lead to trouble when sideswiped by surprising economic recession.
In conclusion, the market had reason to celebrate this morning, but I suspect the caution that was reflected in the sharply downward close was likewise due. I expect that with time, we will find that the day’s market enthusing news seen in durables orders will be shown to be due to exports. Furthermore, there should be concern that this economic stabilizing force could soften over time, given consumer sentiment and economic conditions in both Europe and the United States.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.