Core Durable Goods New Orders See Gentle Uptrend in July
Jacob Hess
August 24, 2023
The volatility in durable goods readings over the course of the year has been wild. So far, there hasn't been a headline move below 1% or above -1%, and that hasn't changed in July. Durable goods new orders fell a sharp -5.2% MoM to start the third quarter which reverses strong readings in the second quarter of 2.0% MoM in May and 4.4% MoM in June. All of these readings have been distorted by abnormally large movements in transport orders, so it is important to filter those out. Durable goods orders excluding transportation industries were actually up 0.5% MoM which builds on the small gain of 0.2% MoM in May. The YoY rate of growth increased to 1.1% which is the highest since the beginning of the year.
The major distortions in the report came from the nondefense and defense aircraft segments which were down -43.6% MoM and -10.9% MoM respectively. Altogether, the transportation equipment sector fell -14.3% MoM which was the main cause of the -5.2% MoM headline decline. In other segments, order growth was a lot better. Machinery orders grew 1.1% MoM after a weak June. Primary metals and fabricated metal products both extended gains last month, up 0.1% MoM and 0.7% MoM respectively. Computers and electronics were the only industry to see a negative print at -0.1% MoM. In total, the core nondefense capital goods (ex-aircraft) segment moved up 0.1% MoM and 2.3% YoY in July which is about what the consensus estimates suggested would happen.
In terms of unfilled orders and inventories, there was not much movement at all. The same core segment saw a -0.1% MoM decline in unfilled orders and no movement in inventories at all in July. The data suggest that durable goods firms feel a bit frozen in the current economic environment as the outlook remains largely cloudy. The build-up of inventories that occurred in response to supply chain issues has remained largely stagnant since the beginning of the year. On an annual basis, capital goods inventories were up 5.0% YoY, down from the 5.6% YoY in June and the 9.8% YoY at the beginning of 2023. Little to no inventory growth means that there will be little to no help from that segment of GDP in the third quarter if the trend continues. And as unfilled orders stop being filled and new order growth continues to decelerate, there will be little help from corporate investment as well.
The good news is that the first durable goods orders report of the third quarter does not point to a contraction. But at the same time, it does not support the strong 5.8% Q3 2023 GDP growth estimate given by the Atlanta Fed (as of August 16th). Somewhere in between is a happy middle ground where the US avoids a recession and glides into a soft landing with easing inflation and low growth.
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