U.S. Durable Goods Orders Rise by 3.4% in March

Durable goods orders are up by 3.4% after a rise of 2.4% in February. In most cases this sort of back-to-back gain would set a strong chain of growth in place. Instead, orders are still in a hole following a plunge of 8.8% in January. On balance the durable goods report shows some progress – better than expected progress -- after a very weak start in 2007. To be sure this month’s improvement does not wash out the weakness from earlier in the year. But it goes a long way to putting the MFG sector on firmer ground. Unfilled orders continue to look very strong in this report. One interesting feature of this report is the high degree of volatility it has showed. Volatility is up by 2 ½ times compared to early 2005 making it difficult to discern trend. Within the last seven months there have been THREE monthly changes in orders of 8% or more.

Three month trends are lower because in January orders were off by 8.8% and that is driving the last three month trend calculation. Next month that will fall out of the calculation and we have two quite firm months to add to whatever result April brings. On balance while we cannot say the current trends are good or solid, we can say that these lumpy data make us unsure of exactly which trend to trust. IF the data turn positive in April, we will be left with nice up trends instead of what we have now for three months.

Diffusion calculations that count the ups and downs of sector growth rates instead by overall weighted magnitudes of growth also show weakness. That’s over three months the weakness has not just been ‘severe’ but also broad-based.’ Three months shipments’ diffusion shows a value of 42 implying that over three months more sectors showed shipments decelerating compared to their six month behavior. Orders diffusion for three months was worse, too, at 28 showing orders increased in three months compared to six months in under 30% of the industries. But unfilled orders continue to mount up with 87% of the sectors showing that unfilled orders rose faster in three months than they did over six. Sales growth outpaced inventory growth in a small minority of sectors over three months. The weakness that the 8.8% drop in orders created seems to have permeated most measures and sectors for industry. Fortunately in the past two months MFG sectors show signs of breaking out of it.

The chart above plots the volatility of orders. It is quite clear that orders have had some voracious ups and downs. The past three months mimic a pattern from the previous three moths of showing a huge decline in orders followed by two quite robust monthly gains.

If we look at the major seven sectors (primary metals, fabricated metals, machinery, computers & electronics, electrical equipment, transportation equipment, and all other durables) we find that until six months ago the trends were declining and seemed to bottom. That is true of trends for both shipments and orders. But over the recent three months trends splayed in all directions, with most turning lower. Over the backward looking periods of three months, six months, and one year, order backlogs continue to show that they are rising and doing so fairly steadily. Work is piling up but increasingly it is not getting done. One singularly common feature is that these stepwise growth rates show across almost all sectors that inventory growth has been slowing. The sole exception is primary metals where prices have begun to flare once again. For computers & electronics, as well as for electrical equipment, stocks of inventories have actually been reduced.

It seems that inventory liquidation is in progress or at least that balance is being restored. After the sharp drop in orders, the desire to control stocks is understandable. We continue to see MFG as a sector that has undergone adjustment.

The MFG surveys for April (so far) continue to be uneven. It is not clear when they will light up MFG output again. For now it is a curiosity that the consumer has held up but that US business investment has been so lean. US investment and capital goods weakness is particularly surprising with the release of new German GDP data today and all the commentary there about how capital goods investment is driving German growth. Especially with the euro at these levels how could German firms benefit so much and US firms so little? What are US firms doing so badly that they are getting none of this business and investing nothing (or less) at home to boot?

GDP expanded 0.7% in the UK in Q1 2007, the same as in Q4 and a bit better than forecasters' estimate of 0.6%. The year-on-year gain was 2.8%. At first glance, the most notable aspect of this Office for National Statistics "preliminary" GDP report is a decline in manufacturing. That sector's value added declined by 0.3% from Q4. It was up just 1.4% from a year ago. However, this is not seen as a sign of weakness; most segments of this sector, according to ONS's "Briefing Notes" held basically flat.

The main story in the UK data, at least for this quarter, is the upturn in the mining sector. The opening of the new Buzzard oil field in the North Sea yielded a 1.4% quarterly advance in the mining sector following almost five years of decline. Utility output also gained 1.4%. The services sector remained the mainstay of growth, up 0.8% and 3.5% year-to-year. Transportation and business services both had expansions of more than 1%.

The other main economy to publish Q1 GDP today is South Korea. Its growth was 0.9%, also the same as in Q4, with 3.9% growth year-on-year. Unexpectedly for an Asian country, manufacturing output declined here as well, by 0.8%. Consumer electronics and electrical equipment were the main sources of the decrease, according to industrial production data through February. Again, as with the UK, analysts seem unconcerned. Korea publishes its entire array of GDP, including the expenditure side, in this initial quarterly report, and observers took note of a good gain in exports, up 3.2%, following just 0.5% in Q4. In volume terms, exports constitute almost 60% of Korea's total GDP. So the implication is that, in the absence of evidence of a demand slowdown in China or the US, Korea's manufacturing sector can remain in an overall expansion, if not every single quarter.

The Korean services sector is also expanding. It grew 1.2% in Q1, also duplicating the Q4 gain. Transportation, finance and health care had the biggest increases. Among other demand components, household consumption gained 1.3%, and capital investment was up 2.0%, mostly in equipment.