U.S. Durable Goods Orders +5.9% in July, Details Strong
Overall U.S. durable goods orders increased by a m/m 5.9% in July after an upward revised 1.9% gain in June (last reported as +1.3%). The reported headline result for July was well above the 1.0% gain expected by the market, but as usual interest lies in the details rather than the often volatile overall result. This month, the message from the details was strong, which follows weakness in June and May, strength in April and March, and weakness in February and January. While choppy on a m/m basis, the underlying trend of key series is improving, which is consistent with the path of the ISM new orders index. However, with these data for July, before credit market turmoil began in earnest, they are viewed as old news and not necessarily representative of current economic conditions.
In terms of capital spending, nondefense capital goods orders excluding aircraft rose by a m/m 2.2% in July after a 0.1% decline in June, a 1.5% drop in May, a 2.0% gain in April, and a 4.6% jump in March. Results for January and February (-4.4% and -2.4%) were suppressed by declines in orders for heavy trucks and heavy truck engines. These items were affected by new EPA emission regulations that took effect on January 1st and which caused demand to be pulled forward into 2006 so that purchasers avoided the new regulations. March and April orders seemed to be much less affected by this issue, and hence the strong rebound in capital goods orders. Subsequent softness in May and June was probably mostly due to payback from the outsized strength in the prior two months. Todays strong result for July is heartening, but as stated above, not necessarily of current economic conditions given recent credit market events.
Shipments of nondefense capital goods excluding aircraft increased by a m/m 0.5% in July after a 0.8% drop in June and gains of 0.7% in May and 0.9% in April. The level of these shipments in July was only a smidgen above the average for Q2 as a whole, so there is little momentum entering Q3.
Orders for core durable goods (which exclude the volatile categories of civilian aircraft and defense capital goods) leaped by a m/m 4.1% in July after a 0.1% decline in June, a 0.9% drop in May, a 2.4% increase in April, a 1.9% rise in March, and declines of 1.6% in February and 3.7% in January. This category also encompasses the heavy truck and truck engine data discussed above, and the same reasoning holds for recent patterns as does the caveat concerning July strength.
Elsewhere in this report, inventories of durable goods rose by a m/m 0.1% in July after no change in June and gains of 0.1% in May and 0.4% in April. We are not assuming any great contribution (positive or negative) from inventories in terms of Q3 real GDP growth, and this report is broadly consistent with than notion.