By Dirk van Dijk
New Orders for Durable Goods dropped 0.8% in August. That was slightly better than the consensus expectations of a 1.0% drop. The August headline numbers were unrevised (fairly unusual for this series) at a 0.1% decline.
The Durable Good series is often very volatile from month to month. While the headline number was better than expected, it is still a back to back drop which is not what we want to see. However, when we scratch below the surface, this was not a bad report.
Most of the drop from last month was due to the extremely volatile Transportation Equipment side. Excluding transportation equipment, new orders surged 1.7%, much better than expectations for a 0.4% increase. More specifically, the Non-Defense Aircraft component was weak, dropping 25.5%, reversing a 25.2% increase in August (revised up from 23.4%) and a 49.9% rise in July. This segment is usually the reason if we get an unusually bad (or good) headline durable goods number.
Non Defense Aircraft is mostly orders for big 777’s and 747’s from Boeing (NYSE:BA), which are very expensive items. It also includes orders for business jets from firms like Textron (NYSE:TXT). A few orders for new jumbo jets can really skew the numbers for the month.
More surprising was a 2.7% drop in the other big part of transportation equipment orders, Motor vehicles, which were down 2.7% on top of a 9.1% drop in August (revised from a 8.5% decline). Those numbers are at sharp odds with everything else we have been hearing out of Detroit lately. I would not be surprised at all if that number gets revised much higher next month.
Overall Transportation Equipment orders were down 7.5%. Last month was revised up to a 0.6% gain from a decline of 0.3%. In July orders rose by 15.0%.
Orders Excluding Defense
If one wants to gauge how much demand for long lasting goods is coming from the private sector, then one needs to strip out orders from the Pentagon (although it still counts civilian orders from the government). Orders excluding Defense were down 1.1% after falling 0.3% in August. But in July they were up 4.9%.
The drop ex-Defense looks a bit inconsistent with the other numbers in the report since we had a very sharp 33.9% drop in Defense aircraft orders, but that is after at 24.6% rise in August (revised up from a 22.5% gain). However, overall orders for Defense Capital Good (throw in things like tanks and ships) rose by 8.6% more than reversing a 1.9% drop last month (revised from a 5.7% drop).
Core Capital Goods
One of the most significant details of this report is what is known as “core capital goods.” Those are orders for non-defense capital goods, excluding aircraft. That is a very good proxy for what businesses are investing in equipment and software. That investment is a direct input into the GDP growth calculations, and one of the real bright spots for the economy in this recovery. That is the sort of spending that is a bet on the economic future of the country, and is also one of the areas that trends to swing with overall economic conditions. Those swings are a big factor in determining if the economy is growing or shrinking.
On that front, the news so far this year had been one of steady improvement. Business investment in equipment and software has been one of the few robust areas of growth in the economy. It looks like that will continue as core capital goods orders increased by 2.4% in September, although last month’s 1.1% gain was revised down to a 0.5% increase.
Business investment in equipment and software added 0.55 points of the 1.30 total growth in the second quarter, even though it is just 7.33% of the total GDP. In the first quarter, it was on balance responsible for more than the total growth of the economy, adding 0.60 points of the total 0.40 growth points.
In other words, absent the increase in business investment in equipment and software, total growth in the economy would have been negative in the first quarter. The strength in the September numbers suggests that it should be a solid contributor to growth again when we get the first look at the third quarter GDP numbers tomorrow.
The fall in aircraft orders, both defense and non-defense, is bad news not only for the big names like Boeing, and the big name suppliers like United Technologies (NYSE:UTX) and Honeywell (NYSE:HON), but also for thousands of much smaller sub-contractors as well. However, I would not get too worried about the change in any given month as they are the most volatile part of a very volatile overall data series.
Year Over Year Comparisons
Stepping back a bit and looking at how orders have been running in the first nine months of this year relative to the first nine months of 2010 shows a very sharp divergence between the two. The civilian side is simply going gangbusters, with orders up 32.1% year to date, while the Defense side has been lagging badly, falling 13.8% on a year-to-date basis.
From an overall big picture point of view, that is not really a bad thing. If we are going to get the budget deficit under control, we are going to have to spend less on Defense, and that will mean buying fewer fighter jets and helicopters.
The other areas of the economy were mostly up. Orders for Primary Metals rose by 2.6%, a sharp acceleration from the 0.1% rise in August, and that was revised up from a 0.8% decline. July was even stronger with a 7.4% rise. Year to date, primary metal orders are up a very strong 24.8%.
Fabricated metal products orders rose 1.9%, but that was after a 0.7% decline last month, which was revised down from a 0.5% drop, but July was revised to a decline of 0.8% from a 1.1% decline. Year to date, fabricated metal products orders are up 7.5%.
There were some notable areas of strength as well in the report. Orders for computers (and related gear) rose by 6.0% on top of a 5.3% gain in August, and are up 10.8% year to date. Orders for communication equipment, on the other hand, fell by 0.6% after rising 5.3% in August (revised down from a 7.8% gain). However, that comes after a 21.1% plunge in July. Year to date, that has been a very weak segment of the economy, with orders down 20.5%.
Orders for Machinery rose 1.8% reversing a 2.1% drop last month. Last month was revised down sharply as it was originally reported as a gain of 0.1%. Machinery orders are up 16.5% on a year-to-date basis. In other words it has been a pretty good year so far for firms like Caterpillar (NYSE:CAT).
Electrical Equipment & Appliances
Orders for Electrical Equipment and Appliances were up 1.9% in September on top of a 3.4% rise in August, but have been growing more slowly on a year to date basis, rising just 5.6% this year. Similarly, miscellaneous durable goods had a decent month, with orders up 1.0%, but that as after a 0.8% decline in August and up just 3.8% on a year-to-date basis.
Overall this was reasonably good report. We came in better than expected on a headline basis, but with the volatility of this series, the beat was not significant. If one excludes the transportation sector, it was much better than expected, and by a margin that is significant even given the volatile and heavily revised nature of the numbers.