Durable Goods Orders Better Than Expected

A 214 percent jump in orders for defense aircraft together with strong gains for computers and communications equipment headline a better-than-expected 0.8 percent rise in September durable goods orders. Yet when excluding transportation equipment and with it the gain for defense aircraft, orders managed only a 0.1 percent which is 3 tenths shy of expectations.

Another weakness in the report is a 0.1 percent decline in core capital goods orders (nondefense ex-aircraft) which is pointing to a flattening in business investment. And shipments for core capital goods have come to a standstill, unchanged the last two months which will be negatives for tomorrow's GDP data on business investment.

Turning back to orders, another weakness is a sharp decline for primary metals which had been surging in prior months on tariff effects. Still, year-on-year growth in metal orders is near 20 percent which tops other yearly readings that are in the mid-to-high single digits to low double digits.

And there is plenty of strength in September's data including a second straight very large build in unfilled orders, at 0.8 and 0.9 percent the last two months. Part of this build reflects backed-up orders for primary metals which have swelled by 1.1 and 1.3 percent the last two months and which offer strong evidence of tariff-related pre-buying.

Inventories rose a sharp 0.7 percent in September following a rare draw of minus 0.2 percent in August. September's build will be a plus for third-quarter GDP. And relative to shipments, which rose 1.3 percent, inventories are actually more lean, at an inventory-to-shipments ratio of 1.60 vs 1.61 in data that point to the constructive need to build inventories further.

This report is hard to read but a key takeaway is year-on-year growth, at 7.9 percent overall and 5.9 percent ex-transportation. Monthly volatility aside, these gains offer solid evidence of the strength of the nation's factory sector.