Durable Goods Orders Stronger Than Expected

Indications on the factory sector have been mixed as is April's durable goods report. The headline came in at a stronger-than-expected gain of 3.4 percent in April with March revised 6 tenths higher to a gain of 1.9 percent. Vehicles orders gave an important boost to April, up 2.9 percent as did the always volatile commercial aircraft component which swung 65 percent higher. But the ex-transportation reading, which excludes vehicles and commercial aircraft, rose a more modest and as-expected 0.4 percent. A negative in the report is a sizable 0.8 percent decline in core capital goods orders which ominously is the third straight decline for this reading and which points to stubborn weakness in business investment, itself the result of uncertainty in the general business outlook. There are, however, solid points of strength in the report including 0.6 percent gains for both total shipments and total unfilled orders. The gain for unfilled orders is the largest since July 2014. Another plus is a 0.2 percent decline in inventories which pulls down the inventory-to-shipments ratio to a leaner 1.65 from 1.67. Vehicle strength is an important foundation for the factory sector, one tied to domestic consumer demand and a strength that highlights this otherwise mixed report.

Recent History Of This Indicator:
Durable orders have been up and down month to month but flat on a trend basis. Orders are expected to rise a moderate 0.3 percent in April but the spread is wide, between minus 0.6 percent and plus 1.3 percent. Similar strength is also expected when excluding transportation which is expected to rise 0.4 percent. Capital goods data have also been flat, pointing to what are flat business expectations ahead. Still, strength tied to the decline in the dollar, which will help exports, and to higher oil prices, which will boost energy equipment, appear certain to give a lift to the factory sector, sooner than later.