Durable Orders Data: What Recession?

Based on the advance report on manufacturers, shipment, inventories and orders, the Commerce Department reported on Wednesday that new orders for long-lasting U.S. manufactured goods, a key indicator of the national manufacturing sector, jumped 1.3% or $2.9 billion to $219.3 billion in July ’08.

The consensus had expected a 0.7% decline. This was the third consecutive monthly increase and followed a 1.3% June increase. Excluding transportation, new orders rose 0.7% and are up 3.6% on a y/y basis. If we exclude defense as well, new orders increased 2.8%.

July shipments of manufactured durable goods increased $5.3 billion or 2.5% to $218.3 billion. This followed a 0.9% June increase.

Unfilled orders for July are up 29 of the last 30 months and have increased $6.6 billion or 0.8% to $824.4 billion, up almost up 14% versus last year.

Non-defense capital goods orders excluding aircraft in July increased $4.5 billion or 6.3% to $76.3 billion. Meanwhile, July defense orders decreased $2.9 billion or 25.7% to $8.4 billion.

As we have pointed out on more than one occasion, the claim that the U.S. economy is currently in recession is in direct contradiction with the healthy trend in business investments. The discontinuities in the data simply reject the validity of the argument. Analysts had expected a 0.5% drop in durables orders excluding transportation. But, even when volatile transportation orders get stripped out, we get a 0.7% demand increase. The shipments component showed a 2.5% advance versus the previous month’s 0.9% increase. Core shipments of capital goods have increased consistently in the last several months, helping in the process sustain productivity growth, thus influencing GDP positively.

While I agree the parameters of defining recession are quite different ; the most simplistic one, I believe, would be  applying the term recession as an encompassing parameter of the economy in its entirety, rather than just sector-selective. Once this principle is applied, then we are certainly not receding. Look for a Q2′08 upward revision.

Comments

[basehitz:]

Numbers on the surface are misleading. Drilling down shows that understating inflation overstates growth. Credit for analysis goes to Barry Ritholtz for showing the misrepresentation. (his blog: bigpicture.typepad.com...

Key excerpt:
"Part of the reason the GDP number looked so good was because the GDP price index for the second quarter was marked at just 1.2. In other words, BEA subtracted from nominal GDP 1.2% in order to produce their version of "real" (inflation-adjusted) GDP."

Goldman Sachs analyst notes:
"Durable goods orders beat expectations with a 1.3% month-on-month increase in July. But the apparent strength is due to higher prices, not stronger activity. In fact, deflating orders by the producer price index for durable manufactured goods shows a 9.4% year-on-year drop in real orders, the worst since early 2002.
"Even if we adjust for the unfavorable year-on-year comparisons that partly explain this plunge, the recent data look surprisingly similar to those seen in the runup to the 2001 recession."

Maybe not so good report after all.

2008 Aug 28 06:22 PM

[investor88:]

Good analysis by basehitz, it is useful information that cannot be gleaned by just looking at the numbers published. The stock market is celebrating these published numbers but we have to be cautious.

2008 Aug 28 10:42 PM