Have we hit bottom? Aircraft lead durable goods orders higher in July

Durable goods orders jumped 4.9 percent in July, as aircraft orders doubled, the U.S. Commerce Department announced Wednesday. The core rate, which excludes the often-volatile transportation component, rose 0.8 percent -- the third straight monthly gain and its longest uptrend in four years.

Economists surveyed by Bloomberg News had expected July durable goods orders to rise 2.5 percent. In June, they fell 1.3 percent, after a 1.8 percent rise in May. Economists had also expected the core rate to rise 1.1 in July.

Over the past seven months, durable goods orders have now fallen 26 percent. However, the rate of decline has clearly lessened in the past four months -- another sign that the recession is forming a bottom.

In July, shipments rose two percent and inventories fell 0.8 percent, signaling that manufacturers continue to trim inventories to re-align them with demand. Economists note that producers may be "inventory short" as the recovery starts, due to large losses sustained from having too much product as the nation's worst recession in a generation devastated sales. That lack of inventory should boost GDP growth in the second half of 2009, assuming typical demand, as producers play catch-up.

Also in July, orders for non-defense, non-aircraft capital goods declined 0.3 percent, but core capital equipment orders -- the best monthly gauge of business investment -- rose 0.5 percent. Transportation goods orders surged 18.4 percent, including a 107 percent jump in civilian aircraft orders; electrical equipment increased 5.3 percent, fabricated metals increased 2.8 percent, primary metals increased 2.6 percent; electronics rose 1.6 percent; and machinery declined 6.6 percent.

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 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.

Economic Analysis: July's durable goods order data is certainly a positive for the economy, and U.S. stock markets should interpret it as such. The sector is displaying more evidence of a recovery. Still, 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 rise for quarters, not months, before one can safely say that a sustained economic recovery is underway.
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