October Durable Goods Lifted by Defense Orders

Durable goods rose 0.4 percent in October, but the rise was largely supported by a jump in defense aircraft. Core capital goods orders fell and shipments point toward a slower pace of equipment spending in Q4.

Little to Be Thankful for in the Durable Goods Report

Orders for durable goods came in stronger than expected in October, advancing 0.4 percent. The better turnout also came on the heels of a notquite-as-bad September, where orders were revised to show a decline of 0.9 percent rather than the previously reported fall of 1.3 percent. But beyond the headline, there were few details for which to be thankful.

The positive outturn for this month’s headline was largely attributable to a 45.3 percent jump in aircraft orders for the defense sector, hardly a bellwether of near-term demand. Excluding defense, orders fell 0.6 percent.

With the jump in defense aircraft orders, transport orders were up 3.4 percent. After seasonal adjustment factors, orders for civilian aircraft were roughly flat on the month, but orders for the larger motor vehicles & parts sector rose 0.3 percent. This uptick is mildly encouraging given that we are now beyond the months in which the timing and durations of model-year changeovers distorted recent reads on auto orders.

Excluding the transportation sector, orders fell 0.9 percent. Weakness was broadly based and hints at some possible effects from lower commodity prices creeping into investment decisions, as primary metals, fabricated metals and machinery were all negative. Discouragingly, core capital goods orders, which exclude defense and civilian aircraft, fell 1.3 percent for the second-straight month. The three-month average annualized rate of growth for this component has now slowed to 2.7 percent from 17.0 percent as recently as August. The slowdown stands in stark contrast from a number of the purchasing managers’ indices. The new orders component of the national ISM index has held above 60 for four consecutive months and would suggest a pickup in core orders. New orders in the Philadelphia F ed’s manufacturing index stood at a 25-year high in November, and while other November regional indices are not quite as robust, the orders components are all in positive territory.

Fourth Quarter Equipment Spending Off to a Weak Start

Shipments for durable goods orders inched up only 0.1 percent in the month. Core capital goods shipments, however, fell 0.4 percent and suggest growth in equipment spending will be hard pressed to beat Q3’s doubledigit pace in the fourth quarter.

Inventories for durables rose 0.5 percent in October, pushing the inventory-t0-sales ratio up to 1.65. The three-month average annualized rate slowed slightly during the month. This is the first piece of “hard” data for Q4 inventories and while still early in the quarter, it would not surprise us to see inventories provide little, if any support, to GDP growth in the current quarter.