US: Transportation sector boosts Durable Goods Orders – Wells Fargo

Data released on Thursday showed that Durable Goods Orders rose 2.3% in May, below expectations. Analysts at Wells Fargo point out the increase was driven by a solid showing in the transportation sector as the outlook for the aircraft industry improves and the parts shortages affecting the motor vehicle industry at least do not appear to be worsening. They see the trend in core capital goods orders remaining impressive and indicating solid investment.

Key Quotes: 

“After April's durable goods orders disrupted a rare 11-month run of undisturbed gains, orders for long-lasting goods bounced back 2.3% in May. A few factors contributed to getting orders back on track. First, defense orders, which were a meaningful drag on total orders last month, turned around to increase 17.4%. Second, transportation orders bounced back 7.6% last month.”

“The durable goods report is a fairly reliable gauge of where equipment spending figures in the GDP accounts is headed and also a decent proxy for capital spending more broadly. The key is to strip out defense spending and the lumpiness of aircraft orders.”

“Core capital goods orders has already had a better rebound from the pandemic era than it did in the wake of either of the prior recessions (2001 & the fallout from the financial crisis in 2008-2009). In both of those periods it took years for the level of core orders to get back to its pre-recession peak. Not only have core capital goods orders fully retraced losses, the level today is 7.3% above its prior cycle peak.”

“Core capital goods orders slipped 0.1% in May, although after accounting for a sturdy half a percentage point upward revision to April's gain, the current level is higher than last month's print even if the momentum is fading a bit.”