Durable goods orders exceed expectations despite multiple headwinds

Summary

Despite a backdrop of a worsening supply chain crisis and rising material costs, core capital goods orders climbed in August even as unfilled orders stacked up. A sixth straight monthly increase in shipment of core capital goods suggests Q3 GDP will see a boost from equipment spending.

More than just a boost from aircraft

Durable goods orders grew 1.8% in August, about three times the consensus-expected gain of 0.6%. The increase also comes on the heels of a substantial upward revision that flipped July's initially reported a decline to an increase of 0.5%.

A surge in aircraft orders was largely expected and while the more than $7 billion increase in bookings for civilian aircraft provided considerable lift, there were modest gains even after excluding aircraft. Signs of stronger business spending were evident in an a1.3% gain in electrical equipment and a 1.4% gain in computers and communications equipment orders.

The fingerprints of the supply chain problems were all over this report. We discuss the latest sourcing developments below, but in terms of the impact on the top line, some of the biggest declines outside an 8.3% drop in defense spending were areas where shortages have been cited in the ISM survey. These include motor vehicles and parts (down 3.1%), machinery (down 1.2%), and primary metals (off 1.5%).

Orders are coming in faster than businesses can fill them

As has been the case for months, the theme in the manufacturing sector specifically and overall business investment more broadly is that there is no lack of demand. The problem continues to be strained supply chains amid a worldwide competition to sourcing increasingly scarce supplies.

In that regard, while it is encouraging to see core capital goods orders exceed expectations coming in with a gain of 0.5% in August and with an upward revision to July, the real satisfaction for most businesses will be not so much taking the order, but actually delivering the product that matters.

Consider for example the fact that unfilled nondefense capital goods orders, rose 1.4%, which was almost three times the increase in actual core capital goods. We have been hearing from a number of businesses who report turning away businesses for lack of supplies and needed help on the labor front. The fact that unfilled orders are outpacing actual orders and shipments suggests these anecdotal examples are endemic to the broader economy. 

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