Durable Goods Orders Jump in June

Following a 1.0 percent decline in May, durable goods orders rose 0.7 percent as the headline number has been positive for 4 out of the past 5 months. The defense sector had little effect on the overall reading.

Ending Q2 on a Strong Note

Durable goods orders increased 0.7 percent in June, finishing off the second quarter on a strong note. The underlying details of the report were also relatively firm, as new orders ex-transportation were up 0.8 percent. In the previous two months the defense sector played a large role in affecting the headline number, however, this was not the case in June as defense only grew 2.5 percent month over month. Despite being a typically-volatile series, durable goods have shown steady growth thus far this year, with positive gains in four of the past five months. 

Nondefense capital goods orders ex-aircraft more than reversed May’s decline, growing 1.4 percent. This brought down the 3-month annualized rate to 6.7 percent from 12.2 percent in May, but this still signals firm core growth. The transportation sector posted a modest gain of 0.6 percent, but was dragged down by vehicles & parts which fell 2.1 percent. This comes as May’s figure was revised downward, despite the continued strength that we have seen in auto sales. The weakness for vehicles & parts in June could reflect the shutting down for retooling of auto plants before the turn of the new model year. On the other hand, the more-volatile series of nondefense aircraft provided support for the transportation sector, growing 8.2 percent. 

Shipments and Inventories Support Growth

Shipments were up 0.1 percent in June, reversing the previous months’ decline. Nondefense aircraft also provided a boost for shipments, while machinery and vehicles & parts were the notable decliners. Nondefense capital goods ex-aircraft shipments, which are used to estimate the equipment portion of GDP, were down 1.0 percent. Despite this weakness, the 3-month annualized figure is up 4.1 percent as the underlying trend here continues to be positive. We look for equipment to surge at a double-digit pace in the second quarter following the first quarter decline. 

Inventories were up in June, rising 0.4 percent, and have reached the highest level since the series was first published on a NAICS basis. This supports our view that inventories will provide a boost to second quarter GDP after being a serious drag in the first quarter. Although inventories have reached a high level, which could invoke concerns of unintended inventory building, the inventories-to-shipments ratio has been relatively constant over the past few years, suggesting inventories are not greatly out of balance with actual demand. 

Unfilled orders were up 0.8 percent which suggests further strength going forward. This is consistent with recent PMI readings both at the regional and national level. Today’s strong report is further encouragement that the economy will return to growth in the second quarter and should continue to be strong through the remainder of 2014.