(06-24-21) Finally Going Somewhere – After April’s durable goods orders disrupted a rare 11-month run of undisturbed gains, orders for long-lasting goods bounced back 2.3% in May. A few factors contributed to getting orders back on track. First, defense orders, which were a meaningful drag on total orders last month, turned around to increase 17.4%. Second, transportation orders bounced back 7.6% last month. Shortages of key parts in the auto sector are, at least, not getting worse. A number of factories have resumed production since temporarily idling plants earlier this spring, leading to both a rebound in employment and new orders—motor vehicle & parts orders rose 2.1% in May. That still leaves orders 6.5% below pre-pandemic levels in contrast to total orders (up 9.7% since February 2020), but May’s gains hint that the outlook for auto production may be getting less gloomy. Speaking of less gloomy, after two of the roughest years for the domestic aircraft industry as Boeing’s most popular model was grounded and then air travel plummeted amid the pandemic, conditions in the sector are looking up. Boeing reported 73 new orders in May, including 61 for the 737 Max, which after accounting for cancellations and seasonality, led to a 27% month-over-month increase in the value of aircraft orders. A Breather for Core Capital Goods Orders – The durable goods report is a fairly reliable gauge of where equipment spending figures in the GDP accounts is headed and also a decent proxy for capital spending more broadly. The key is to strip out defense spending and the lumpiness of aircraft orders. Not only can aircraft orders exaggerate short-term swings due to their big ticket values, they, along with defense orders, often do not reflect current underlying business demand. Core capital goods orders has already had a better rebound from the pandemic era than it did in the wake of either of the prior recessions (2001 & the fallout from the financial crisis in 2008-2009). In both of those periods it took years for the level of core orders to get back to its pre-recession peak. Not only have core capital goods orders fully retraced losses, the level today is 7.3% above its prior cycle peak. That said, core capital goods orders slipped 0.1% in May, although after accounting for a sturdy half a percentage point upward revision to April’s gain, the current level is higher than last month’s print even if the momentum is fading a bit. Unfilled orders are still increasing at decent clip, hinting that May’s pause may just be a breather though it is too early yet to tell. Shipments Continuing to Catch Up – In order to turn an order into a shipment you need many things, most critically the input components and the workers to man the machines; both have been in short supply this year. That said there is some indication that things are beginning to normalize, if only incrementally. After a late winter storm hindered freight movement in February, nondefense capital goods shipments have posted three consecutive monthly gains lifting the 3-month average annualized growth rate to 10.7%. Our expected growth rate for equipment spending in Q2 is 11.1%. The growth here is coming from a broad base. Among core shipments categories, only computers and related products posted a decline. The 0.9% decline here was a small one, particularly after you consider the fact that it came after a 6.6% surge in the same category in the prior month.
Durable Goods – Shipments and New Orders (06-24-21)
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