(07-27-21) Headline Miss but Core Capital Goods Orders Hold Up – Durable goods orders came in weaker than expected in June with an overall gain of just 0.8%, well short of the 2.2% that had been expected, but the fact that prior month figures were revised higher takes some of the sting out of the miss. This was particularly true for core capital goods orders which came in closer to consensus estimates, rising 0.5% in June versus an expected 0.7% on the heels of an upward revision that lifted May’s scant 0.1% gain to a respectable pick-up of 0.5%. Motor vehicles and parts orders have been hit-and-miss so far this year and even though orders have fallen in four out of the first six months of the year, orders for this category are still up 5.5% relative to June 2020. It is not a demand-side problem for the autos space, and we look for a sustained increase when the supply chain pressures abate. Defense spending has fallen in four out of five months amid the drawdown of U.S. military presence in Afghanistan and Iraq. However, the declines are being offset by a rebound in civilian aircraft orders. After having been beset by the combined challenges of aircraft safety concerns and the pandemic which for a while sapped demand for travel, the domestic manufacturing of aircraft is rebounding. Nondefense aircraft orders have risen by double digits in percentage terms in each of the past three months. Shipments Overstates Strength Due to Rising Prices – Capital goods shipments also came in a bit lighter than expected, but not enough to derail our expectations for another strong quarter of equipment spending in the Q2 GDP report on Thursday. While the value and lead time of aircraft contribute to lumpy orders numbers, they are still a major component of equipment spending. Including aircraft along with other nondefense capital goods, shipments more than rebounded from their dip in May with an increase of 1.9%. For the second quarter, nondefense shipments picked up to a 15.8% annualized rate, propelled by a 97.1% annualized increase in aircraft and parts shipments as the outlook for air travel improved and more airlines were ready to receive Boeing’s previously grounded 737 MAX. We suspect the overall pace of real equipment spending in Q2, however, to be less impressive than what is implied by the latest nondefense shipments. For one, orders and shipments are reported in nominal terms. Like nearly everywhere else these days, prices have picked up materially, with the PPI for finished capital equipment up at a 5.7% clip in Q2. Second, import growth of capital goods also eased in Q2, suggesting slower spending by U.S. businesses. While it will be tough to maintain the robust pace of the past year, we still look for equipment spending to remain strong in the second half of the year and grow in the mid- to high-single digits. Case in point: unfilled orders are up at a 9.7% annualized rate the past three months, the fastest pace clocked since the end of 2019.
Durable Goods – Shipments and New Orders (07-27-21)
Pipe Exchange
14025 West Road
Suite 100
Houston, TX 77041
- Phone: 713.934.9480
- Fax: 713.934.9490
- Email: sales@pipexch.com
