Drop in aircraft bookings drags durable goods orders down in August

Durable goods orders unexpectedly fell 2.4 percent in August, the U.S. Commerce Department announced Friday, as a large decline in aircraft bookings pushed the index lower. However, as the core rate was unchanged in August.

The core rate has risen in the previous three months -- making August the fourth straight month without a decline, another tentative sign that an economic recovery is gathering steam, despite the unexpectedly negative number announced today.
However, Economists surveyed by Bloomberg News had expected durable goods orders to rise 1.0 percent and the the core rate to rise 0.8 percent in August. The commerce department also revised downward the increase of durable goods in July to 4.8 percent, which came after a 1.4 percent fall in June.

Over the past eight months, durable goods orders have declined roughly 25.0 percent. This is one indicator of the amount of productive capacity and output taken out of the economy. But the rate of decline has clearly lessened in the past five months -- another sign that the recession has bottomed.

In another sign that manufacturers continue to trim inventories to re-align them with demand, in August, shipments fell 1.4 percent and inventories fell 1.3 percent. However, given the long recession, economists in general expect the inventory pare-back to subside.

Earlier this month, Norbert J. Ore, Chairman of the Institute for Supply Management's Business Survey Committee, declared the cyclical factory decline was over. "The year-and-a-half decline in manufacturing output has come to an end," Ore said. Ore added that growth appears to be sustainable in the short-term as factory inventories have been trimmed for 40 consecutive months and supply chains will have to re-stock to meet rising demand.

In August, transportation orders plunged 9.3 percent, shipments fell two percent, orders for electronics (excluding semiconductors) dipped 0.7 percent, unfinished metals declined 1.9 percent, and orders for capital equipment (excluding aircraft and defense goods) declined 0.4 percent. On the upside, defense capital goods orders rose 1.1 percent and machinery orders increased 0.7 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 follow the statistic because rising durable goods orders usually indicates that businesses are experiencing sustainable demand, which usually translates into higher revenue and increased production by the manufacturing sector -- two bullish signs for the U.S. economy and stock market.

Economic Analysis: Don't fret about the August dip in durable goods orders: one month does not a trend reversal make, and the more stable ex-transportation index was flat. The latter suggests likely continued gains in durable orders in the months ahead. Based on the data over the last four months, it is safe to say the nation's manufacturing sector is starting to grow. Still, investors should keep in mind that the factory down-cycle has been long and deep, and the economy will need to see durable goods orders rise for quarters, not months, before one can say the U.S. is on the road to restoring a considerable portion of output reduced during the recession.
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