Durable Goods Mirage: Good Headline Number, Very Poor Details
The Census Bureau''s Durable Goods Report show orders rose 0.8%. The good news pretty much stops there.
- Excluding transportation, new orders rose 0.1 percent.
- Excluding defense, new orders fell 0.6 percent.
- Core Capital Goods orders fell 0.1%
- A doubling in orders for defense aircraft headlines 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 increase 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 marginal rise 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 mixed and really doesn't show accelerating strength. But a key takeaway is year-on-year growth, at 7.9 percent for overall orders and 5.9 percent ex-transportation. Monthly volatility aside, these gains offer solid evidence of the strength of the nation's factory sector.
The strength in the factory sector is government spending. We are going to waste more money on unneeded defense items.
Inventories are hardly "lean". Historically, I rate them about average. They are only lean if sales are about to pick up. And if retail sales are about to turn lower, which is more likely, then inventories are on the heavy sign.
GDPNow estimates third-quarter GDP real final sales at 1.5%. It's inventory contribution 2.1%. That strikes me as "heavy", not lean.
Mike "Mish" Shedlock