New Orders for Durable Goods rose 2.7% in January. That was in line with the consensus expectations.
In some ways, this report as the exact opposite of the December report, or the December report as originally reported. The December numbers were all very heavily revised, and revised upwards. It was first reported as a decline of 2.5%, but now they say new orders only fell 0.4%. That does not give me a lot of confidence in this month’s numbers.
The good news can be pegged on the extremely volatile Transportation Equipment side, and more specifically, from the Non-Defense Aircraft component, which is often the case when we get an unusually good (or bad) headline durable goods number. That is mostly orders for big 777’s and 747’s from Boeing (BA), which are very expensive items. It also includes orders for business jets from firms like Textron (TXT). A few orders for new jumbo jets can really skew the numbers for the month.
Excluding transportation equipment, new orders fell 3.6%, far below expectations for a 0.6% increase. Overall transportation equipment orders were up 27.6%, and more specifically, non-Defense aircraft orders rose a stunning 4900%. No I didn’t forget to put in a decimal point. It’s just a case of dividing by almost zero.
The non-Defense aircraft numbers are beyond volatile. In December, aircraft orders dropped to almost nothing, falling 97.1% (revised from a 99.5% decline) and that came on the heels of a 59.6% drop in November.
If one want to gauge how much demand for long lasting goods is coming from the private sector, then one needs to strip out orders from the Pentagon. Excluding Defense, orders for durable goods were up 1.9% in January, after falling 0.2% in December. The first read on the ex-Defense number was a decline of 2.5% in December.
Last Month Revised Up Again
While this month’s numbers are extremely disappointing — especially if that aircraft component is stripped out — last month’s numbers were revised sharply higher, and that is the second month in a row that has happened. The December revisions, though, are some of the largest I can recall seeing, and I have been looking at this data and writing about it as it comes out for five years now.
Usually the revisions to the prior month are a few tenths of a percent, not over 2 full percent. The changes in the base for month-to-month changes makes interpreting the current month numbers more difficult.
Looking at the ex-transportation numbers, for example, clearly a drop of 3.6% when a 0.6% increase was expected is a huge disappointment. But the base increased by 3.0% last month, not 0.5%. Net-net, it was still worse than expected, but no where near as big a disappointment as the raw number would suggest.
Core Capital Goods
One of the most significant details of this report is what is known as “core capital goods.” Those are orders for non-Defense capital goods, excluding aircraft. That is a very good proxy for what businesses are investing in equipment and software.
That investment is a direct input into the GDP growth calculations, and one of the real bright spots for the economy in the first half of the year. That is the sort of spending that is a bet on the economic future of the country, and is also one of the areas that trends to swing with overall economic conditions. Those swings are a big factor in determining if the economy is growing or shrinking.
On that front, the news in January was just plain ugly. Core capital goods orders fell by 6.9%. On the other hand, December was revised up to a gain of 4.3% from the initial report of a 3.1% rise. Still, this has to be counted as a disappointment. If it is not revised away next month, it would be a sign that businesses are pulling in their horns on new investment, and that sure will not help the recovery.
What Else Is Depicted?
While the rebound of non-Defense aircraft is the biggest sector story in this report by a very wide margin, it is not the only one of note. While a total lack of orders for last month can hardly be good news not only for the big names like Boeing, and the big name suppliers like United Technologies (UTX) and Honeywell (HON), but eventually it is bad news for thousands of much smaller sub-contractors as well.
It is not surprising to see a rebound, as even with higher fuel costs, I don’t think the civilian aviation industry was going to disappear entirely, which was what was implied by the December numbers. The Aerospace industry also got some help this month from the Defense side. Orders for defense aircraft rose by 20.6% in December, more than reversing a 11.0% decline in December.
If the country is going to make any progress on bringing down the deficit, defense spending is going to have to be on the table, and that probably means very little growth in spending on new planes and helicopters.
Orders for computers (and related gear) fell 9.6% on the month, and that is after a 9.9% fall in December, originally reported as a 11.2% decline. That is starting to get worrisome, and is very bad news for the Tech sector.
There were some other dark spots in the report as well, most notably orders for Machinery, which fell 13.0% for the month, reversing a 16.6% increase in December. Here again, the revisions to last month complicate the picture. We were originally told that they were up 10.6% on the month. I have to say that revisions of that size make you want to throw out the whole report as useless. Unfortunately, it is the best data we have on durable goods. Still, I would discount the report as not being all that reliable.
Uglier Than the Headline Indicates
Overall this was an ugly report, much worse than the headline would imply. The upward revision to the December numbers takes bit of the edge off of the bad news. Clearly we are not going to see another 4900% fall in non-Defense aircraft orders next month. It will be interesting to see how much the January numbers are revised next month.
With the stimulus wearing off and state and local government forced to cut spending sharply (or raise taxes) to balance their budgets, there is not a lot of fuel to spark a robust recovery. Consumers are still trying to deleverage their balance sheets by paying down debt and building up their savings. After trillions upon trillions of their wealth vaporized in the collapse of the housing market they have no choice but to do so.
Housing construction is normally a major positive force in pulling us out of recessions, but is totally missing in action this time around. Higher oil prices will also take a bite out of consumer’s wallets, leaving them with less money to spend on other things. On the other hand, there are indications that the pace of job creation is going to accelerate, and that should have the effect of raising consumer spending.
Businesses still have plenty of excess capacity so the only reason to invest is in areas that cut costs, not in areas that expand capacity. Cutting costs usually means substituting capital for labor. That helps raise productivity, but is not particularly helpful in reducing unemployment.
Very low interest rates and immediate expensing do help spur investment, but regardless of how little it costs to borrow, or the ability to quickly write off the investment on their taxes, no business is going to want to invest in capacity that is just going to sit idle from lack of demand.