New Orders for Durable Goods rose 2.5% in March. That was well above the consensus expectations of an increase of 1.8%. In addition, the February numbers were revised sharply upwards. It was first reported as an decrease of 0.6%, but now they say new orders rose 0.6%. All in all, a nice combination of acceleration, positive surprise and upward revisions.
Part of the story was 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 rose 1.3%, slightly above expectations for a 1.2% increase. Last month was revised upwards from a decline of 0.3% to an increase of 0.6%. Overall transportation equipment orders were up 5.9%, and non-defense aircraft were up 0.9%.
Last month’s numbers were heavily revised for the sector. Total transportation equipment orders are now seen as having been up 0.9% in January, when it was originally reported as an decline of 1.9%.
If one wants 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. Rising Defense orders were part of the strength this month. Excluding Defense, orders for durable goods were up 2.3% after rising 2.0% (revised from 0.4%) in February.
Another Month of Upward Revisions
Last month’s numbers were revised sharply higher, and that is the fourth month in a row that has happened. The February revisions were about the same size as the January ones, but much smaller than those of December. Those December revisions, were 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. However, just look at it as more good news. The bigger-than-expected increase came off of a bigger-than-expected base.
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 so far this year is one of steady improvement. Core capital goods orders rose by 3.7%, up from a 0.5% increase last month (revised from a drop of 1.3%) after a 5.9% tumble in January (revised from a decline of 6.0%). Business investment in equipment and software has been one of the bright spots in the recovery and it looks like that is going to continue.
Unlike the last two months, this report is not primarily about the Non-Defense Aircraft segment. They rose just 0.9%, down from an increase of 35.1% in February and an eye-popping 5558.2% increase in January. That is not a typo, but a reflection of a total collapse of such orders in January. Did I mention that non-defense aircraft orders can be very volatile?
The rebound in orders is 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 good 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.
While the civilian side of the Aerospace industry was tame after a big rebound, the Defense side rebounded after taking a hit last month. Orders for Defense aircraft rose by 6.3% after they fell by 16.4% in January (revised from a 18.4% decline).
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. On the other hand, we do seem to be finding more and more places to use those Defense aircraft. Overall Defense capital goods orders (including aircraft, but also tanks and ships, etc.) were up by 7.6%, but only after they were down by 24.4% last month, but that is after a 33.7% increase in January.
Orders for computers (and related gear) fell by 1.1%. Last month they were up by 0.1% (revised from a decline of 0.4%). In January, orders were down 5.2%. That is starting to get worrisome, and is very bad news for the Tech sector. Most of the weakness was from the communications equipment part of tech. There orders were down 3.4% on the month, but at least that is not as bad as the 5.4% decline in February and the 19.1% fall in January.
Orders for Machinery rebounded, rising 4.2%. Last month’s figures were revised to a decline of just 0.1% from the previous report of a 4.2% decline in February, on top of a 12.8% decline in January.
Overall, this was a very strong report. While the upwards revisions are welcome, they are also a little disconcerting. Theoretically, new orders for durable goods should be an important piece of information about the direction of the economy. However, if the real number turns out to be vastly different than what is published, then it is hard to rely on it.
The consistent upward direction of the revisions is reassuring, but should one try to adjust this months numbers on the expectation that the upward revision trend will continue? That seems like getting into dangerous territory to me.
Economic data collection falls into the Non-Defense discretionary spending part of the Federal Budget, and that is the area that has been most targeted for budget cuts. Sort of seems to me like trying to increase the fuel economy of a car by cutting off the power to the dash board. You might save a few watts (or dollars) but it does not seem like a very good idea.