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Economy in Brief

U.S. Durable Goods Orders Surprisingly Strong For A Second Month
by Tom Moeller June 24, 2009

The factory sector is showing some life recently and may be emerging from the moribund state of the last year. The May report of durable goods orders indicated a 1.8% jump following a little-revised 1.8% April gain. The latest increase easily outpaced  Consensus expectations for a 0.8% decline and during the last three months orders have risen at a 5.3% annual rate. That follows a 5.8% decline during all of last year.

A 3.6% rise (-25.8% y/y) in transportation equipment orders led last month's increase in total durables bookings. That followed a 6.2% rise during April. Higher orders for commercial aircraft led the gain with a 68.1% (-47.7% y/y) surge. Conversely, orders for motor vehicles & parts fell 8.1% (-29.3% y/y) as the auto companies continued to suffer the effects of weak sales. Machinery orders also posted a notable 7.7% increase (-26.9% y/y) after slight uptick in April but electrical equipment orders fell 1.1% (-27.0% y/y) after little change during April. Orders for primary metals rose slightly for the second month but were off by nearly one-half from the year-ago level. Orders for computers & electronic products reversed most of their April decline as computer orders rose 9.4% (-20.2% y/y) but orders for communications equipment slipped m/m and have moved sideways this year.

The capital goods sector may have begun to show life. Orders for nondefense capital goods recovered an April decline with a 4.8% gain due to the jump in aircraft orders noted above. Nondefense orders excluding aircraft also firmed but by just enough to return to the level of last February. During the last ten years there has been an 80% correlation between the y/y change in nondefense capital goods orders and the change 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%.

As might be expected, the improvement in orders has yet to show up in higher shipments. Shipments of durable goods fell 2.1% last month (-19.5% y/y) and have fallen in each month since February of last year. That y/y decline in shipments has been accompanied by a 21.1% y/y drop in industrial production of durable goods. During the last ten years, there has been an 80% correlation between the change in shipments of durable goods and the change in durables industrial production.

Inventories of durable goods fell for the fifth consecutive month. The 0.8% decline followed a 1.1% April decline that was deeper than reported initially. On a three-month basis decumulation of durable goods inventories has been at a near-record 13.5% rate. Quick decumulation of inventories has been notably across industries. Backlogs in order books have fallen in each of the last eight months and during the last year by 7.7%, a rate of decline which is the sharpest since 2003.

The durable goods figures are available in Haver's USECON database.

Taming the Credit Cycle by Limiting High-Risk Lending from the Federal Reserve Bank of Dallas is available here. 

NAICS Classification (%) May April Y/Y 2008 2007 2006
Durable Goods Orders 1.8 1.8 -23.3 -5.8 1.4 6.2
    Excluding Transportation 1.1 0.4 -22.4 -1.2 -0.3 9.1
Nondefense Capital Goods 10.0 -2.9 -26.9 -6.8 3.5 9.4
 Excluding Aircraft 4.8 -2.9 -21.8 -0.3 -2.7 10.7
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