First decline in five months for Durable Goods, but it's a big one

Summary

The plunge in orders for new durable goods in June overstates weakness in capex demand. Yet durables data are still consistent with a stalling in the industrial space, and we remain hesitant the pickup in activity implied by Q2 equipment investment in the GDP report can be sustained.

Drop in Durable Goods orders overstates weakness

New orders for durable goods plunged 6.6% in June, marking the largest one-month pullback since the pandemic struck in early 2020. While the manufacturing environment is still struggling, this morning's data overstate recent weakness.

For starters, nearly all the decline in orders activity last month can be traced to nondefense aircraft specifically, which declined almost 130% during June. When we exclude broad transportation, durable goods orders rose 0.5%. Further, the separately released data on advance Q2 GDP this morning showed real equipment investment grew at an 11.6% annualized rate in Q2, or the fastest since the first quarter of 2022.

But that robust growth also requires some context. Part of the divergence comes down to orders versus shipments (chart). While orders activity indicates demand, it is shipments that flows into GDP as it measures actual quarterly production. Just as the June durables data somewhat overstate recent weakness, Q2 real equipment investment may overstate the underlying run rate for capex today.

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