Durables look good from afar, but are far from good

Summary

Durable goods orders exceeded expectations, and a surge in core capital goods shipments will lift estimates for third quarter business spending. Yet after backing out a surge in defense spending and accounting for steep downward revisions, the report gets a lot less exciting.

Orders available by the slice

New orders for manufactured durable goods surprised to the upside in August by increasing $0.5 billion or 0.2%. Note, however, that defense orders for capital goods in August increased a whopping $2.3 billion. So, if you set aside bookings from the Pentagon, new orders for capital goods in August actually decreased $2.6 billion or 2.9%.

That was not the only one-off factor this month; we knew, for example, that new orders for Boeing aircraft declined in August for a second straight month. Today's report confirms that civilian aircraft orders dropped by $3.2 billion or 15.9%. This comes on top of even steeper declines for this category in July.

The ex-transportation line was actually up 0.4% which was better than expected, but after accounting for a steep downward revision, that change nearly erased last month's increase so there is less to celebrate.

Motor vehicles & parts orders were up 0.3% and shipments were up 0.2%; this marks back-to-back gains for both categories. This is August data and the UAW strikes did not begin until mid-September, so there is no reflection of the strikes' impact on this data and due to the limited roll-out of the work stoppages, the impact on September's data will likely be limited as well. Failing to come to resolution soon though could lead to serious disruption in October data.

Core capital goods orders offer a time-tested strategy to filter out the expected volatility in durable goods orders data. This component rose 0.9% which is as large a monthly gain as we have seen in the past year, but once again, revisions rained on the parade. A scant gain of 0.1% was revised away to a 0.4% monthly decline in July.

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