US Durable Goods Orders: No slowdown, only because of defense and inflation – Wells Fargo

Data released on Wednesday included the preliminary June Durable Goods Orders report. Analsyts at Wells Fargo point out data suggest manufacturing continues to defy expectations for a slowdown in activity, “But stripping away defense orders and adjusting for inflation suggests activity is cooling.” According to them, “an ugly end to the quarter for core capital goods shipments positions a weaker Q2 for equipment spending than we anticipated, but advanced data on inventories should offset some of that weakness in tomorrow's Q2 GDP report.”

Key Quotes: 

“Durable goods data continue to defy expectations for signs of a slowdown in manufacturing. That's true at least at first glance. Fresh orders for durable goods rose 1.9% in June, marking the fastest monthly change in six months. That was despite the consensus expectation for a 0.4% decline.”

“But the details on orders suggest strength can largely be tied to defense aircraft orders, which tend to be pretty volatile. Defense aircraft orders rose 80.6% during the month. Stripping that away and zooming in on private-sector activity, nondefense capital goods orders excluding aircraft were up a more muted 0.5%. Inflation chips away at that even further—a back of the hand adjustment for the 0.7% increase in producer prices for private capital equipment last month suggests the real gain in core capital goods orders was modestly negative.”

“We're becoming a bit more cautious in terms of the medium-to-long-term outlook for capex spending. We've long held the view that a more sustainable growth trajectory for manufacturing may be warranted today as producers chip away at record amounts of backlog. But the recent downward revisions to manufacturing data make that a tougher story to tell, as does the slowdown in core order backlogs.”