Data for July Durable Goods Orders was released today and provided further support for a positive view on the U.S. economy. On a headline level, orders rose by 2.0% from June which was revised up to a 4.1% increase from the initial report of 3.4%. Great news there, especially considering expectations were for a -0.4% decline. If we take a deeper dive into the numbers, do we still maintain our optimism? Below is a quick analysis (Spoiler Alert: The answer is yes).
Excluding volatile segments – Check.
One of the trickiest aspects of the Durable Goods Orders report is the inclusion of highly volatile segments such as aircraft. For example, the monthly change for nondefense aircraft and parts was -31.7%, 69.7%, and -6.0%, respectively, for May through July. When we exclude transportation, new orders rose 1.0%.
Capital goods – Check.
Many people use new orders for core capital goods (nondefense, excluding air) as a proxy for business investment. We saw a 2.2% rise there from a 1.4% increase in the previous month. Capital goods represent items used in the production of goods and services so it represents spending for future growth.
Additionally, shipments of core capital goods rose 0.6%. Shipments are important as an economic gauge as they are used in the calculation of GDP. With an upward revision to 0.9% for June (initial -0.1%), we could see a nice bump in Q2 GDP revision to be released on Thursday. In a note published this morning, Brian Wesbury, Chief Economist at First Trust, stated “Plugging these and other recent data into our models, we are forecasting real GDP grew at a 3.3% annual rate in Q2 and will be up at a 2.0% annual rate in Q3.”
There is weakness year-over-year in certain parts of the data. However, we must consider oil producers have buttoned up spending and production in recent quarters due to the sharp decline in oil prices and a stronger USD has impacted exports. 2015 is not 2014 and 2014 was not 2013. The rate of growth in manufacturing declined for the first part of the year before finding a floor in the spring. Since then we have seen an uptick. The key is we are still seeing growth (above 50 = expansion).
An earlier report in the month showed business inventories rose 0.8% largely in part to a 1.4% increase in the auto industry. The focus is whether sales are pacing alongside stock buildup. Auto sales have been one of the brightest spots in the economy: recently and since the Great Recession.
Sales overall ticked up 0.2% to move the seasonally adjusted inventories/sales ratio to 1.37. This ratio has moved higher over the last year so we will keep a close watch to see if there are any signs of a slowdown in demand.
With back-to-school shopping largely unaccounted for in the data and strong retail sales growth (0.6% in July), we could see a normalization in the ratio in the coming months. On the other hand, too much inventory and not enough demand can cause problems for subsequent quarters of growth as inventory buildup is a large factor within GDP. Inventory growth added 0.87% to Q1 GDP which helped to reduce the level of contraction to -0.2%. As David Ross, Managing Director of Global Transportation & Logistics at Stifel, states in a recent note, “We believe we are going through a destock (or rightsizing of inventories) presently. It appears to have begun in 2Q15 and we expect it to continue through 3Q15.” Inventory buildup and drawdown is part of the natural ebb and flow of healthy industry. We will see how August and September set up for the Q4 holiday shopping season.
The durable goods number from today adds more paint to the canvas that recent data for employment, housing, and the consumer have already put their strokes on. From where we sit, the picture is appealing. It may not be a Picasso or da Vinci, but it’s certainly no airbrush caricature from a carnival either. As we discussed on Monday, the Astor Economic Index® shows above average growth. Hopefully China, Greece, etc. do not trip and accidentally put their fists through the picture.
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