U.S. Durable Goods Orders Surged in December, Gain Slowed in 2007

Orders for durable manufactured goods surged 5.2% last month helped very much by a jump in orders for commercial aircraft. December's rise was the largest m/m gain since July. Nevertheless, a reduced increase in orders for all of 2007 highlighted the factory sector's weakness. The 1.0% annual rise in orders was a fraction of the 6.3% gain during the year prior and it was the weakest rise since a decline in 2002. Consensus expectations had been for a smaller gain in December.

Excluding the notably volatile transportation sector, orders rose 2.6% after a slight decline in November. Again, however, the rise did little to make up for weakness earlier in the year. As a result, orders less the transportation sector altogether nudged up just 0.3%, the weakest annual increase since 2003.

In the transportation sector, orders for aircraft & parts surged 26.2% (23.1% y/y) and that followed an 18.4% November jump. The nondefense portion of those orders rose 11.7% (28.4% y/y) and defense aircraft orders more than doubled m/m (7.1% y/y. Working the other way were orders for motor vehicles & parts which fell 2.3% (-12.4% y/y) and these orders were down 4.6% for the year, the second year of decline.

Orders for nondefense capital goods rose 5.4%, about as they did in November. Here again, though, the rise did little to recoup earlier weakness. The m/m gain only lifted the rise for all of last year to a third the rise during 2006. 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 with capital goods shipments is, as one would expect, a larger 92%. During December, orders for nondefense capital goods less aircraft posted a 4.4% surge which more than made up declines during the prior two months.

Computers & related products orders rose 4.6% (4.4% y/y) in December and made up about half the weakness during the prior two months. Orders for computers (9.3% y/y) and for communications equipment (9.3% y/y) were strong in the month but for the whole year these orders were down with lower prices.

Primary metal orders ended the year with a slight 0.2% slip (+6.9% y/y). For the year orders rose 3.7%, one third the 2006 increase.Orders for electrical equipment, appliances & components recovered all of the prior month's decline with a 4.1% (1.8% y/y) gain.

Overall shipments of durable goods ticked down slightly in December (-0.1% y/y) for the fifth decline in seven months. Less transportation shipments rose 0.4% (2.2% y/y) while these shipments rose just 0.7% for the full year following a 6.6% 2006 increase.

Inventories of durable goods surged 1.1% (3.6% y/y). Indicative of an inventory backup the three month gain rose to 2.3%, its strongest since late last year while less transportation inventories rose 0.5%. The three month increase accelerated to 1.3%, its highest in a year.

Weakness remains in play in the UK retail sector. In January the ‘+4’ orders and sales results continue a trend of progressively weaker net balance results that extends back to early 2007. Still those readings bested the ‘-5’ for sales and the ‘-9’ for orders that retailers themselves had expected. So while conditions have steadily worsened, they have still exceeded the expectations of the participating retailers themselves, at least in December. Expectations for sales ‘for the time of year’ were a weak ‘-16’ for January, however, and that reading resided in the bottom 22 percentile of its range. Looking ahead to February ‘time of year sales’ is still negative at ‘-5’, but retailers appear to have scaled back on their pessimism. Sales and orders compared to a year ago are expected to be in the ‘+10” range. If so that would pose a bit of a reversal to the ongoing down trend. But January was the first positive sales surprise in the past five months and only the second in the past nine. Retailers have had a reason for their pessimism.

The ISAE business index is still in a weakening trend. However, it currently only hovers near the midpoint of a range it has occupied over the last eight years.

But looking at the table below we see that the domestic economy is generally in WORSE shape for overall industry as well as each industry segment compared to the foreign sector. Overall the domestic economy order/demand situation is in the 36th percentile of its range. The foreign sector is in the 50th percentile of its range. These comparisons play out like that across industry segments as well.

One interesting conclusion that this suggests is that it is not the strong euro that is crushing Italian industry. Since its greatest weakness comes from the domestic economy, Italy’s biggest problems seem to be home-grown. One problem may be that jobs are just not paying what they should and growth in jobs is not what it should be to support business at home. Certainly Italian consumer confidence is very weak. And through that channel the international economy is being felt, but in a more structural way, not in a cyclical currency way. Since Italian firms seem to be doing better abroad than at home the euro per se does not appear to be the proximate cause of its weakness. Internationalization and competition in general may be root problems. Competitiveness may be an issue but if it is, it is an issue in a structural sense. And that will be a tougher problem to solve than a too-strong euro.

Italy, like France and Germany, shows that one of the weakest portions of the economy continues to be the consumer sector. There, the domestic order situation is in the bottom 22nd percentile of its range compared with a nearly as weak 23rd percentile for overseas orders. Production is in its 22nd percentile. The sector is the weakest overall among Italian industries.>

The theme of a weak consumer/consumer-serving sector is one of the most durable across the Euro Area.