U.S. Durable Goods Order Weakness Portends Easing Of Factory Sector Growth

By itself, a 0.3% gain in July durable goods orders might be an encouraging sign from the Commerce Department for factory sector growth. But several aspects of the report paint a dimmer picture of the U.S. manufacturing sector. 1) The increase followed two months of slim gain which together left the three-month change down 2.1% after double-digit growth this spring. 2) Excluding bookings in the highly volatile transportation sector, orders fell by 3.8% and pulled three-month growth to -8.7%. 3) Orders weakness has been widespread amongst industry groups.

Leading last month's orders' weakness was a 15.0% decline in the (+14.1% y/y) machinery sector and a large 12.7% drop (+7.8% y/y) in orders for computers & related products. Electrical equipment orders dropped 5.9% (+5.4% y/y), for the third decline in the last four months, and fabricated metals orders fell 1.0% (+8.2% y/y). Partially offsetting these declines were a 5.3% increase (19.9% y/y) in motor vehicles and a 3.9% gain (-17.3% y/y) in orders for communications equipment.

Earlier strength in nondefense capital goods orders also gave way to weakness with a 2.8% July decline. That lowered the three-month change to -8.0% after more-than tripling earlier this year versus 2009. Much of this weakening was due to lower bookings for commercial aircraft. Excluding aircraft, July orders still fell 8.0%, lowering three-month growth to -0.6% after surging this spring.

Orders weakness has begun to weaken shipments of durable goods. Though shipments rose 2.2% last month and at a firm 7.4% annual rate during the last three, they reflected growth in commercial aircraft (10.4% y/y and motor vehicles (18.7% y/y). For July, excluding the transportation sector altogether, shipments rose just 0.6% and dropped at a 2.0% rate during the last three months. Machinery shipments weakened (8.8% y/y) as did shipments of computers (4.1% y/y). To an extent this weakening was offset by continuing strength in nondefense capital goods (8.8% y/y).

A weakening of inventory accumulation was behind some of the easing in orders & shipments. Durable goods inventories rose 0.6% (2.2% y/y) after much stronger spring gains. That's, however, just a partial reversal of a 12.8% decline during all of last year. Inventories remained 9.8% below the late-2008 peak. Finally, backlogs of durable goods orders slipped 0.1% last month but remained down 2.0% y/y.

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