Durable Goods 4.2% Headline Increase Belies Bad News

The Durable Goods, advance report shows new orders increased by 4.2% for June 2013.  While the headline number sounds great, not so fast, the gains are on volatile aircraft new orders.  Shipments did not change.   Aircraft and parts new orders from the non-defense sector increased 31.4%.  Aircraft & parts from the defense sector increased 18.7%.   Excluding all transportation, which includes aircraft, new orders came in at zero.  In other words, without transportation new orders didn't grow at all.


Durable Goods


Below is a graph of all transportation equipment new orders, which increased by 12.8% for the month.  Motor vehicles & parts grew by 1.3%.


durable goods transportation new orders SA


Core capital goods new orders increased 0.7% for June, which is a much better indicator overall for economic activity.  Machinery increased 2.4% in new orders.  Computers & electronics dropped -2.6% in new orders.  Core capital goods is an investment gauge for the bet the private sector is placing on America's future economic growth and excludes aircraft & parts and defense capital goods.  Capital goods are things like machinery for factories, measurement equipment, truck fleets, computers and so on.  Capital goods are basically the investment types of products one needs to run a business. and often big ticket items.  A decline in new orders indicates businesses are not reinvesting in themselves.



To put the monthly percentage change in perspective, below is the graph of core capital goods new orders, monthly percentage change going back to 2000.  Looks like noise right?  That's why one advance report does not an economy make. Yet over and over again Wall street trades on these figures and even worse, just the magic new order monthly percentage change.



Shipments overall had no change and bear in mind new orders are not necessarily shipped the next month an order is made. Below is the monthly shipments  percent change for all durable goods shipments.


durable goods shipments


Shipments in core capital goods decreased -0.9% as machinery shipments declined by -1.2%.



Inventories, which also contributes to GDP,  increased 0.2% for June.  Excluding transportation, inventories had no change for the month.  Graphed below are total durable goods inventories monthly figures.



Core Capital Goods inventories dropped -0.1% for June, the same as May and April core capital goods inventories declined by -0.2%.  Graphed below are quarterly core capital goods inventories annualized percentage change and for Q2 was -2.4%.  This is the lowest quarter for core capital goods inventories since Q3 2009.  In other words, despite the high monthly percentage change on durable goods new orders advance report, there is much in the advance statistics which point to a very low Q2 GDP figure and poor economic growth.



Core shipments contributes to the investment component of GDP.   Producer's Durable Equipment (PDE) is part of the GDP investment metric, the I in GDP or nonresidential fixed investment.   It is not all, but part of the total investment categories for GDP, usually contributing about 50% to the total investment metric (except recently where inventories have been the dominant factor).   Producer's Durable Equipment (PDE) is about 75%, or 3/4th of the durable goods core capital goods shipments, in real dollars, used as an approximation.   Below is the national accounts description of PDE:

Nonresidential PDE consists of private business purchases on capital account of new machinery, equipment such as furniture, and vehicles (except for personal-use portions of equipment purchased for both business and personal use, which are included in PCE), dealers' margins on sales of used equipment, and net purchases of used equipment from government agencies, from persons, and from the rest of the world.

The below graph might give a feel for what kind of investment component we might see on PDE for Q2 2013 GDP. This is the monthly percentage change of nominal values, not real, not adjusted for inflation, for core capital goods shipments. We can see this implies Q2 GDP investment component will be low as core capital goods shipments declined at an annualized -1.2% rate for Q2 2013.



What is a durable good?   It's stuff manufactured that's supposed to last at least 3 years.   Here are our durable goods, related overviews, only some graphs revised.  The durable goods advance report is often revised when the full factory orders statistics are released.

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