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Economy in Brief

U.S. Durable Goods Orders Lowest Since 2005
by Tom Moeller November 28, 2008

October new orders for durable goods collapsed 6.2% m/m in what was the third consecutive monthly drop. During that period new orders virtually dried up as their 11.5% cumulative decline was the largest since the "credit crunch" recession of 1980. Moreover, the level of new orders for durables last month was the lowest since April of 2005. The latest decline followed a revised 0.2% September downtick and a similar 5.5% August collapse. October's drop was roughly double the Consensus expectation for a 2.6% shortfall.

An 11.1% m/m decline in transportation sector orders (-21.6% y/y) led the drop in total durable goods orders last month. Orders for motor vehicles (-23.1% y/y) and for aircraft (-18.1% y/y) both fell sharply.

The industry detail further highlights the recent severe weakness in bookings. Orders for primary metals orders fell 12.6% last month and they're down 29.2% just since July. Machinery orders fell 6.8% last month and they are off 13.0% over the last three periods while October electrical equipment bookings fell 5.3%, off 9.4% during the last three months.

New orders for computers & electronic products also have fallen, but the decline has been not as severe. This total fell 2.4% last month and by 3.5% during the last three. Orders for just computers & related products were quite weak and posted a 5.5% October drop, off 7.2% since July. New orders for communications equipment, however, rose 7.7% last month though that just made up for earlier weakness and they're off 5.0% since July.

The capital equipment sector has shown severe weakness. Orders for nondefense capital goods fell by 3.6% last month and they were off by 12.0% since July. Without aircraft, orders were about as weak as the total and they fell 4.0% last month, off by 9.3% during the last three months. This was the sharpest negative growth since the 2001 recession. During the last ten years there has been an 80% correlation between the y/y gain in nondefense capital goods orders and the rise in equipment & software spending in the GDP accounts. The correlation of the GDP figure with capital goods shipments is, as one would expect, a larger 92%.

Reflecting past weakness in new orders, overall shipments of durable goods fell 2.4%. Their decline during the last three months totaled 6.7% after a 0.1% uptick last year. For comparison, industrial production of durable goods during the last three months fell 6.2%. During the last ten years there has been a 69% correlation between the three-month change in shipments of durable goods and the change in durables industrial production. Less transportation, shipments of durable goods fell 1.7% last month and by 5.4% during the last three months.

Accumulation of inventories of manufactured products has yet to respond to a weaker shipments' growth environment. Inventories of manufactured durables rose 0.4% in October after a 0.2% September increase. The latest gains left three-month growth at 1.5%; hardly a strong rate of increase. In fact it was lower than the recent high of 2.6%. Still, it clearly is too fast for an environment when shipments over the last three months have fallen 6.7%. Tight inventory management techniques today are fostering a fast reaction to changes in the demand environment. Or maybe not. The ratio of inventories-to-shipments rose last month to its highest level since 1996. Clearly, an unwinding of this unwanted inventory buildup has yet to provide downward pressure on factory output.

Monetary Policy and Asset Prices from the Federal Reserve Bank of San Francisco is available here.

NAICS Classification (%) October September August Y/Y 2007 2006 2005
Durable Goods Orders -6.2 -0.2 -5.5 -10.6 1.4 6.2 10.2
    Excluding Transportation -4.4 -2.3 -4.2 -6.1 -0.3 9.1 9.1
Nondefense Capital Goods -3.6 -1.0 -7.8 -9.5 3.5 9.4 17.3
 Excluding Aircraft -4.0 -3.3 -2.3 -3.3 -2.7 10.7 11.6
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