Rise in durable goods orders doesn't tell the whole story

The Commerce Department today reported durable goods orders for June that showed new orders rising 4.2%, much higher than had been anticipated heading into the release of the report. The strength was almost all down to the transportation component though. Excluding transportation, orders were flat for the month. But what does this all mean for the economy?

First up, let’s consider what we mean by ‘durable goods’. Durable goods are defined as being goods that are expected to last three years or longer. These tend to be pricier items, such as furniture, cars, heavy machinery, etc. In other words, not the kind of things that are bought with any great predictability, but instead are purchased only irregularly.

As a consequence, the data in the durable goods report can be subject to sharp fluctuations and is difficult to anticipate. This is particularly true when it comes to highly expensive items such as defence or aircraft - the demand for missiles, battleships or jetliners is extremely erratic, with no trend between months.

The report is split into four sections: new orders, shipments, unfilled orders and inventories. New orders are goods that have been ordered during the month in question. This section of the report, therefore, looks to the future and can be useful for gaining an insight into how businesses are feeling about future spending. A jump in new orders is generally correlated to upcoming economic expansion, whereas a fall may accompany future economic softness.

Shipments are items that have already been sold and dispatched to distributors from the manufacturers for the month in question.

Unfilled orders are items that have been sold but have yet to be shipped.

Inventories is the sum of the value of goods held at factories and distribution branches.

In today’s report, the headline rate of a 4.2% increase in new orders for June was nearly all down to aircraft orders at Boeing. The net change in new orders was 0% once transportation goods were stripped out, which was actually beneath estimates.

Growth in unfilled orders picked up pace in June though, rising 2.1% after a 1.1% increase in May. Once again, a substantial part of this was down to aircraft, but there was broad strength even when excluding transportation, with a 0.9% rise once this component is stripped out. This provides some hope that momentum may be maintained through the summer after a strong May.

From the results of this report, manufacturing looks a little soft outside of the aircraft industry, but those unfilled orders may yet point to a continued upswing in the trend, especially when added to recent indications of strength in the manufacturing sector from several regional Federal Reserve banks.

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