A stunning showing for core capital goods orders steals the show in what
looks on the surface, based on the 1.7 percent headline drop, to be a
weak durable goods report for July. Orders for core capital goods
(nondefense ex-aircraft) surged 1.4 percent to easily beat Econoday's
consensus for a 0.5 percent gain and also top Econoday's high forecast
for 1.2 percent. Computers & electronics as well as machinery were
positive contributors for the capital goods group where July's strength
points to further acceleration for what has already been very strong
growth in business investment.
The headline weakness is tied to
the always volatile commercial aircraft component where orders come in
big batches, and July does not include one of those big batches as
orders fell 35.4 percent. Orders for defense aircraft were also weak and
together with commercial aircraft skew the transportation reading to a
5.3 percent decline. This decline masks another strong positive in
today's report and that's a 3.5 percent jump in motor vehicle orders.
Excluding all transportation equipment, orders inched 0.2 percent ahead
in July.
Turning back to core capital goods, the surge in orders
will feed into shipments which is what the GDP account for business
investment specifically tracks. Shipments here are up 0.9 percent
following a 2 tenths upward revised gain of also 0.9 percent in June.
The July gain marks a fast start for third-quarter nonresidential fixed
investment while the upward revision to June will give a small boost to
revision estimates for second-quarter GDP.
Other details include a
very large 1.3 percent build in durable inventories which had looked
too lean going into the third quarter. Large builds for commercial
aircraft equipment as well as continuing builds for primary metals and
fabrications, both affected by tariffs, gave inventories a boost, one
that will also be a plus for third-quarter GDP. Shipments of durables
slipped 0.2 percent in the month and may reflect stubborn shortages of
truck drivers in the transportation sector. Unfilled orders, which had
been on the climb, were unchanged.
Durable goods are one of the
most volatile indicators on the economic calendar and today's results
further cement this reputation. But looking past the headline and at the
strength of computers and machinery and vehicles, the factory sector
continues to be the headline strength of the 2018 economy.
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