Is the Miss in Durables Orders a Fluke or Sign of Weakness?

Despite widespread expectation for an aircraft-supported gain, durable goods orders fell 0.7 percent in November, non-transport orders fell 0.4 percent and core capital goods orders stalled.

No Boost from Aircraft, Little Strength Elsewhere

There are a lot of things going on in today’s disappointing report for durable goods orders in November, but the two big takeaways are: 1. The expected surge in civilian aircraft orders did not show up and 2. Outside of the volatile transportation sector, orders continue to fall, raising doubts about prospects for business spending as we close out the year.

We think this report paints an unrealistically bad picture of the current orders environment and payback (either from a big surge in December or an upward revision to November) is likely. Having said that, there is no talking around the fact that core capital goods orders are now falling at an 8.2 percent pace on a 3-month annualized basis.

Have We Begun Our Initial Descent?

More than 70 economists submitted a forecast for the Bloomberg survey and none of them (ourselves included) were looking for a decline in November durable goods orders. One major factor driving expectations higher this month was a surge of 224 new aircraft orders at Boeing. That should have resulted in a pick-up in civilian aircraft orders, but today’s report shows an increase of only 0.6 percent for this category. Meanwhile, defense aircraft orders fell 7.8 percent following a surge in orders last month. We are not sure what to make of the disconnect, but we expect the surge at Boeing will eventually show up in civilian aircraft orders either through a surge next month or in a revised look at November.

But What About Business Spending More Broadly?

As we wrote in a special report earlier this month, the cratering of oil prices will most assuredly result in some retrenchment in cap-ex spending, particularly in areas related to the extraction, storage or transport of oil. On that basis, we were not particularly shocked to see a 1.4 percent decline in primary metals or a six-tenths of a percent decline in fabricated metals. Somewhat more concerning, however, is the weakness in other areas, like orders for computers and electronics products, which slipped 1.8 percent.

Non-defense capital goods orders ex-aircraft were unchanged in November, but this key barometer of business spending has fallen in four of the prior six months. It is difficult to reconcile that against survey data which offer a much brighter assessment of business activity. The ISM manufacturing survey came in at 58.7 in November, with the new orders component sitting proud at 66.0, less than a point away from a ten year high.

While the selloff in oil will present some headwinds for cap-ex spending at least in the near term, we think the weakness is overstated in today’s durable goods report.