Robert already covered the report on incomes and outlays, and showed you that consumer spending is flat-lining, and how’s that’s bad news for 3rd quarter GDP.. Another report from the past week that may give us some additional insight into how the 3rd quarter is shaping up is the Advance Report on Durable Goods Manufacturers’ Shipments, Inventories and Orders for July (pdf) from the Census bureau, which covers manufactured equipment and materials generally expected to last more than 3 years. Like all advance reports, the data here is extrapolated from a small sample and will be revised next week when Full Report on Shipments, Inventories and Orders is released, but nonetheless this report does give us data that will eventually input into both personal consumption expenditures for items such as appliances and autos, and capital goods purchases by businesses which will similarly input into the investment category of GDP. So while this report is usually watched for new orders with a look to future manufacturing activity, we'll take a look at the other metrics as well to see how they might play into 3rd quarter growth figures..
July orders fell more than expected as seasonally adjusted new orders for durable goods in July decreased $17.8 billion or 7.3% from $244.4 billion in June to $226.6 billion in July.. Unadjusted new orders fell 19.3% from $255.963 billion in June to $206.515 million in July, but year to date unadjusted orders for the first seven months were at $1,575.410 billion, 3.3% higher than the $1,524.766 billion for the same period last year. All of the remaining number's we'll report on henceforth are from the seasonally adjusted data..
The major factor in the July drop in new orders was a 19.4% fall in new orders for transportation equipment, from $86.4 billion of new orders in June to $69.7 billion in July.. Most of this was accounted for by the collapse in orders for non-defense aircraft and parts to just $13,200 million, less than half of June's $27,690 million.. This was not unexpected, as Boeing had earlier reported they received just 90 orders for passenger jets in July, down from 287 big plane orders in June. Orders for the other major transport sector, motor vehicles and parts, even edged up a bit from $44,787 million in June to $45,021 million in July.. Orders for defense aircraft and parts, however, fell 2.2%, from $5,243 million to $5,129 million in July. Because of the volatile nature of aircraft orders, many prefer to look at new orders ex-transportation; but even those new orders fell 0.6% over the month, from $157,973 million in June to $156,955 million in July. But we should point out that at the end of the quarter there wont be any picking and choosing what to count, and a paucity of aircraft orders will slow the economy just as much as a shortfall in orders for refrigerators.
However, it wasn't just a shortfall in new orders for aircraft that took July down. New orders for computers and electronic products were off 3.6% as well, down to $21,262 million in July from $22,063 million in new orders in June.. Orders for computers were especially hard hit, falling 19.9% from $2,334 million in June to $1,870 million in July.. Orders for communications equipment also fell, to $4,312 million in July, which was 5.5% lower than June's new orders of $4,563 million. And new orders for capital goods, which includes everything from construction and farm equipment to power plants and electromedical instruments, were down 16.1% month over month, from $103,963 million in June to $87,190 million in July. However, this measure of investment grade equipment still includes aircraft and total defense industry orders, so a measure of non-defense capital goods excluding aircraft is also provided, and even excluding those volatile sectors, orders for those so called core capital goods were off 3.3%, from $69,856 million in June to $67,547 million July. In fact, other than that slight increase in orders for motor vehicles, the only other durable goods category that showed a better outlook was fabricated metal products, which saw new orders grow a measly 0.4%, from $29,721 million to $29,838 million. It almost appears as if the spike in interest rates, which we suspected curtailed new home sales, may be influencing outlays for other large purchases as well...
Our FRED bar graph below attempts to capture the month to month change of several of these durable goods categories. In each month from the beginning of 2012, the red bar indicates the percentage change in overall new orders for durable goods for that month. Next in each month, the blue bar indicates the percentage change for all orders for durable goods except aircraft and defense. Then in green we have a bar that shows the change in new orders ex-defense; comparing that to the red bar gives us a good idea how much defense spending influenced the change in any month. Then in orange, we have another special category, new orders for consumer durables ex transportation. Finally, in violet, we have the change in new orders for all non-defense capital goods including aircraft, which is a fair proxy for what’s included in the equipment investment category of GDP, Obbviously, July orders for durables was pretty bad no matter how we look at it; but august of last year was at least as bad if not worse, and it was reversed last September. So we’ll have to wait at least another month to see if there’s been a turning point, or if July was just an aberration..
Shipments of manufactured durable goods in July will affect one or another of the 3rd quarter GDP accounts, whether it be investment, export, government, or personal consumption...and in a mildly bad omen, seasonally adjusted shipments of durable goods in July slipped $0.8 billion, or 0.3% to $228.8 billion. But remember, GDP tracks the quarter to quarter change, so while shipments down a bit in July is not encouraging, it doesn't close the book; shipments were also down by small amounts in April and June in the 2nd quarter, but a strong May turned the quarter positive...
The greatest contraction in July shipments was of computers and electronic products, which shipped $0.9 billion less products in July, falling 3.2% from $27,533 in June to $26,644 in July. Again, it was shipments of computers and related products, which were off 22.6% in July, which dragged the sector down, as computer shipments fell from $2,393 million in June to $1,851 million in July.. Shipments of communications equipment also slipped, off 1.5% from $4,019 million to $3,958 million...but it's the computers that are really in the dumper, as year to date shipments of computers are off 10.4% to $14,849 million.. The only other durable manufacturing category that saw less shipments in July was transportation, where shipments fell 0.1% to $68,768 million, but all of that was due to a 4.6% decline in shipments of military aircraft and parts; motor vehicle shipments were up 0.7% from $44,813 million in June to $45,117 million in July, and shipments of non-defense aircraft and parts rose 1.3% from $11,994 million to $12,146 million.
Seasonally adjusted inventories of manufactured durable goods continued to grow in July, increasing $1.3 billion or 0.4% to $379.1 billion, to another new high;. Inventories of transportation equipment, increasing fourteen of the last fifteen months, are the story here, as they were up 0.6% to $117,061 million in July; ex transportation, inventories only grew 0.2%. The transportation inventory story was all aircraft; inventories of non-defense aircraft and parts were valued at $63,232 million in July, up 0.8% from June, while the value of defense aircraft and parts increased 1.4% to $13,997 million.. Inventories of motor vehicles and parts actually slipped a bit, valued at $25,025 million in June to $25,014 million worth in July...
Unfilled orders for durable goods continued to grow in July, increasing a seasonally adjusted $4.4 billion or 0.4% to a new record at $1,034.3 billion; that's a number 4.5 times July's shipments, so even a month or two of reduced new orders shouldn't slow production. Unfilled orders for capital goods were up 0.5% to $779,748 million, which is an amount nearly 9.4 times July's capital goods shipments. Even unfilled orders for non-defense aircraft were up 0.2% over June to $460,232 million, which is nearly 38 times the value of the aircraft shipped in July. So while there's always a possibly that a crisis of major proportions may result in widespread cancellations of orders already booked, absent that it doesn't appear that Boeing and other durables manufacturers will be curtailing production anytime soon.
(cross posted at MarketWatch 666)