Durable Goods Orders Report Mixed

Strength that is masked by a 1.3 percent headline decline in durable goods orders is, however, no more than modest. Excluding transportation equipment, specifically a second straight drop in civilian aircraft orders and a sharp May drop in orders of motor vehicles, durable goods orders rose 0.3 percent to just edge past Econoday's consensus range. Core capital goods orders (nondefense ex-aircraft) came in on the high end of expectations at a 0.4 percent gain.

But hidden strength is not the overwhelming theme of this report, one that includes a 0.5 percent drop in unfilled orders that follows April's 0.2 percent decline. The effects of the Boeing 737 Max grounding are still unfolding and may be appearing in unfilled orders for civilian aircraft which have fallen 0.9 percent and 0.5 percent in May and April respectively.

A negative in the report, and one that may pull second-quarter GDP estimates lower, is a second sharp fall in shipments of core capital goods, down 0.5 and 0.4 percent which points to contraction for the equipment component of quarterly business investment.

Turning back to new orders, fabrications rose 0.5 percent in May with machinery orders up 0.3 percent, for two industries that are tied closely to capital goods. Weakness in May includes a second sharp drop for primary metals, down 1.1 percent after a 2.0 percent decline in April.

Inventories are a positive in the report, up a strong 0.5 percent and in line with a 0.4 percent rise in shipments to keep the inventory-to-shipments ratio unchanged at a favorable 1.67.

For the Federal Reserve, this report is mixed. The bounce higher in core capital goods orders is a plus though weakness in aircraft, and the risk that 737 effects are now appearing, is a key negative. The US manufacturing is limping along at a modest pace.