Durable Goods Disappointing, Weak Report

New Orders for Durable Goods fell 3.6% in April. That was well below the consensus expectations of a drop of 2.0%. However, the March numbers were revised upwards, slightly offsetting the disappointing April numbers. It was first reported as an increase of 4.1%, but now they say new orders rose 4.4%.

Durable goods orders are a volatile series, and it is not uncommon for a big gain in one month to be followed by a decline the next. Still, these numbers are bad news and indicate a slowing of the pace of recovery.

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. It was part of the story, but not all of it, as even without them the numbers were soft. Excluding transportation equipment, new orders fell 1.5%, far below expectations for a 0.6% increase. Last month was revised upwards from a rise of 2.3% to an increase of 2.5%. Overall, transportation equipment orders were down 9.5%, and non-defense aircraft were off 30.0%.

Useful to Strip Out Defense

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. Falling Defense orders were also part of the weakness this month. Excluding Defense, orders for durable goods were down 3.6% after rising 4.1% (revised from 2.3%) in March.

Last month’s numbers were revised higher, and that is the fifth month in a row that has happened. However, the March revisions were much smaller than the upward revisions we had seen in each of the prior three months. The durable goods numbers often have big revisions, and the odds are still that the revisions next month will be to the upside, but by how much is an open question.

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.

This 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 had been one of steady improvement. This month was a bit of a disappointment on that front as well. Core capital goods orders fell by 2.6%. That is after a 5.4% rise in March, which was revised up from an original 3.7% gain.

Business investment in equipment and software has been one of the bright spots in the recovery. Its contribution to growth looks like it will be smaller in the second quarter. Based on these numbers, it could even be a small drag on growth.

The non-Defense aircraft segment was the weakest part of this report, but that is not particularly unusual. Those numbers are volatile in the extreme. This month they plunged 30%. In March they were unusually well behaved, rising 2.3% (revised up from a 0.9% gain). In February they posted an increase of 39.9% (revised up from 35.1%).

Even that was tame relative to an eye popping 5,558.2% increase in January. That is not a typo, but a reflection of a total collapse of such orders in December. Did I mention that non-Defense aircraft orders can be very volatile?

The fall in orders is bad 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.

While the decline hurts, it really will not be that significant unless orders don’t rebound over the next few months, and history suggests that they will. The Defense side of Aerospace also fell, but not as sharply. Orders for Defense aircraft fell by 8.9% after they rose by 6.0% in March (revised from a 6.3% increase).

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 and such) were down by 5.8%, but after they were up by 14.0% in March.

Orders for computers (and related gear) fell by 4.4%. Last month they were up by 10.1%. Orders for communication equipment part were down 3.4% on the month, and that is on top of a 10.5% plunge in March. Orders for Machinery were also weak, falling 3.4%, but that was after a 7.3% increase in March.

Disappointing, Weak Report

Overall this was a very weak report. While the upwards revisions are welcome, they only slightly offset the loss of steam indicated by the April figures. The decline was very broad-based. Yes, the usual suspects for a bad number — aircraft and Defense orders — were soft, but even if they are excluded, the numbers were soft and well below expectations.

The main saving grace to the report is that this is a very volatile number, and big declines in one month tend to be followed by increases the next. There is, of course, no guarantee that that will happen in May. There has been a distinct upward trend in the revisions, and the revisions in durable goods orders tend to be larger than for most economic indicators. Those sorts of revision trends tend to persist, so it is quite possible that we will learn next month that this months decline was not quite as bad as it looks now.

The consistent upward direction of the revisions is reassuring, but should one try to adjust this month’s 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 dashboard. You might save a few watts (or dollars), but it does not seem like a very good idea.

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