Durable Goods Orders July Preview: There is some catching up to do

Purchases of long lasting consumer goods are predicted to continue their recovery from the March and April collapse following the path of the wider retail sales category.

New orders for durable goods will rise 4.3% in July according to the Reuters survey of economists when it is issued by the Census Bureau at 8:30 am EDT on Wednesday August 25. The June result was revised to 7.6% from 7.3%.

Orders outside of the transport sector that includes automobiles and commercial aircraft, are projected to add 2.1% after June revised 3.6% increase. Non-defense capital goods, the proxy for business spending, is predicted to climb 1.9% following June’s 3.4% increase.  Orders excluding Defense Department procurement rose 9.5% in June.

Durable goods and retail sales

Durable goods are the longevity side of the overall consumer market.  Its purchases, from cars to hair dryers and pet cages are a sub-set of retails sales whose items are designed to last three years or longer in normal use.

Retail sales have had a strong recovery from the 22.9% pandemic plummet in March and April as the US economy shut down rising 27.9% in May, June and July.

The moderation that overcame retail sales in July with the increase falling to 1.2%, below the 1.9% forecast, came after two record months that more than erased the lockdown collapse, see above.  The 5% difference between the March and April decline and the May, June and July gain would, if spread out over the entire five months would result in a 1.0% increase each month. In a normal economy that would be excellent evidence for a healthy consumer and strong job market.

Durable goods have not been quite so buoyant. Receipts plunged 35% in the closure months, regaining 22.7% through June with another 4.3% expected in July. Ex-transport order fell 10.1% in March and April and have returned 6.9% to June with 2.1% forecast for July.  Non-defense capital goods fell 7.9% and recovered 4.9%.

Durable goods

The expected July 4.3% increase for durable goods, almost four times the retail sales gain is likely the result of the weaker return of durable goods so far and their higher cost, especially for automobiles which are often bought on credit.  People may be waiting for assurance that the economy is on the way to recovery before signing up for a five year car loan.

Non-defense capital goods and PMI

Consumer spending, retail sales, has reconstituted 122% of the losses of March and April. Overall durable goods will be at 77% of losses if the July forecast of 4.3% is accurate.   

If the July forecast of 1.9% is correct business spending will have returned 86% of its shutdown losses, better than durable orders but far less that consumption.

July PMI scores from the Institute for Supply Management at 58.1 in services and 54.2 in manufacturing were  better than expected, though weaker than forecast for employment. New orders were exceptionally strong with the service sectors new business volume setting an all-time record. Markit’s preliminary levels for August. 54.8 And 53.6 respectively were also better than anticipated. 

Markit service PMI

It would be uncharacteristic for business planners with three months of rising sales and sharply improving optimism to refrain from investment.

Conclusion

Durable goods order should reflect the general improvement in the consumer outlook in July that continued despite the rising then falling Covid case load.  The economic information of the release is the same as the earlier retail sales numbers and will most likely confirm what the markets already know.