Durable goods orders fall, but core rate rises

The U.S. Commerce Department announced this morning that orders for durable goods fell 2.5 percent in June, while the core rate, which excludes transportation, actually rose 1.1 percent -- another good news-bad news data point for the U.S. economy.

Look for the U.S. stock market Wednesday to emphasize the more bullish core rate, because transportation orders can be volatile on a month to month basis.

Economists surveyed by Bloomberg News had expected June durable goods orders to fall 0.5 percent. They rose a revised 1.3 percent in May. Economists had also expected the core rate to rise 1.1 percent in June.

The key culprit in the June data: transportation orders -- which include orders for jet planes, cars, trains -- plummeted 12.8 percent in June.

Over the past 12 months, durable goods orders have now fallen 26.8 percent, which is indicative of a pronounced recession. However, the rate of decline has clearly lessened in the past three months -- another sign that the U.S. recession is attempting to form a bottom.

Durable goods orders are new orders by stores and businesses for immediate and future delivery of factory hard goods. These orders measure how busy factories are likely to be in the immediate months ahead for such items as refrigerators, washers and dryers, cars, computers, and industrial machinery.

Investors should follow the durable goods statistic because rising durable goods orders usually indicates that businesses are experiencing sustainable growth -- demand -- which usually translates into higher revenue and increased production by the manufacturing sector -- two bullish signs for the U.S. stock market.

In June, shipments fell 0.2 percent, inventories declined 0.9 percent, non-defense capital goods orders decreased 3.4 percent, while defense-based capital goods orders plunged 28.3 percent.

Economic Analysis: Again, although the headline June durable goods stat shows a 2.5 percent decline, the key here is the core rate, which rose 1.1 percent. Transportation orders are notoriously volatile, so put Wednesday's durable data in the category of a mild positive, and the stock market should interpret it as such. The sector's weakness is moderating, but investors should not get giddy yet: the nation has registered an enormous contraction in industrial capacity and we'll need to see durable goods orders reverse, and rise over quarters before one can state that a sustained economic recovery is underway.

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