Durable Goods Orders Not Dismissible

by: Markos Kaminis

Durable Goods Orders offer important insight into the demand for higher ticket items meant to last for multiple years. These purchases are reflective of economic realities, as they will receive great consideration because of the substantial amount of capital involved. The time from order to delivery could be extensive as well and so purchasers need to be relatively certain of their business outlook.

As a result, econo-watchers benefit from following the report because of the sensitivity of such spending to economic conditions. Oftentimes, because of the high ticket price of these items, the change from month to month can fluctuate substantially and offer a noisy perspective into the economy. As a result, some dismiss the changes and even brush off the monthly data point as a volatile measure when it doesn't fit their forecast. However, after reviewing the durable goods order data for July, it is clear that this one is not dismissible.

Business was strong on the top line, with new orders rising 4.2% overall in July, well ahead of economists' expectations for a lesser 1.9% increase, based on Bloomberg's survey. The result also marked the third consecutive month of increase, adding, for some, even more reason to cheer. However, when excluding transportation, new orders actually declined by 0.4%, which matched poorly against the expectation for a 0.4% increase. The difference was the result of the substantial 14.1% increase in orders for transportation equipment. Much of those gains were pinpointed to Boeing (NYSE:BA) as non-defense orders for aircraft and parts increased by 54%. Again, I note that because of the high ticket price of these products, a few more or less month-to-month can make a big difference.

The important take away is that when excluding the aircraft orders, the business outlook was quite different. What's also clear is that businesses are not investing significantly enough due to a feeling of uncertainty about what's to come, but also due to a tangible easing of consumer spending. Illustrating this, new orders for capital goods excluding defense and transportation declined 3.4% in July, after dropping 2.7% in June. It means businesses are not spending, and that reflects poorly for the economy on the whole.

Looking even more deeply into the details of the data, we find that machinery orders were down 3.6% in July, following a 2.5% drop in June. This follows in the natural progression of deterioration in manufacturing, and may precede layoffs for the sector. Regional data and the national ISM manufacturing data have begun to show a changing mood regarding employment for the sector, which follows downgraded expectations and softening business. So for the big industrial players like General Electric (NYSE:GE), Caterpillar (NYSE:CAT) and others, the report may hold special significance. As far as the sector is concerned, the last year's performance of the Industrial Select Sector SPDR (NYSEARCA:XLI) seems to reflect a vulnerable group.

Chart forIndustrial Select Sector SPDR

New orders for computers and related products increased by 3.7% in July after declining by 4.7% in June. That's inconsistent with the latest results from Dell (NASDAQ:DELL) and Hewlett-Packard (NYSE:HPQ), and also with views that potential buyers are waiting on Microsoft's (NASDAQ:MSFT) Windows 8 release. Orders for communication equipment fell 4.0% in July after a 7.4% decrease in June. That's consistent with the caution provided by Cisco Systems (NASDAQ:CSCO) in its discussion post earnings this last month.

New orders for motor vehicles and parts rose by 12.8% in July, after a 0.7% decrease in June. That bodes well for Ford (NYSE:F) and GM (NYSE:GM), which considering my negative outlook for the big three Japanese automakers, Toyota (NYSE:TM), Honda (NYSE:HMC) and Nissan (NSANY.OB), offers all the more reason to consider a change in capital allocation within the sector.

In conclusion, the durable goods orders report, when excluding the volatile transportation results, reflects a market demanding less goods generally. Even before this report, purchasing managers have been indicating a changing mood reflecting more cautious spending patterns. This report offers important economic insight into the demand for durable goods but also for employment and spending generally, and for the economy on the whole. It implies that industrials should reflect the change in their reported operating results and guidance, and share performance. Finally, it supports my longstanding argument that the ills of Europe are in fact contaminating the vulnerable U.S. market as well as hampering the growth of the emerging world.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.