Volatile Transportation Sector Propels Durable Goods Orders Higher

Durable Goods Orders Rose in April
Durable Goods Orders Rose in April

Durable goods orders in April

rose a better than expected 2.9% in April -- providing further confirmation of the ongoing recovery in the U.S. manufacturing sector. Figures for March were also revised as new data showed orders that month were unchanged from February, an improvement from the previously-released 0.6% decline. Orders have now risen in four of the past five months

But the April report also provides a case study in why investors should concentrate on two other durable good statistics besides the top-line stat. If you exclude the often-volatile transportation component, durable goods orders fell 1% in April, which typically would be cause for mild discussion on Wall Street, if not concern -- were it not for the next key metric.

The three-month moving average for durable goods orders (excluding transportation) is still at a healthy 1.9% -- more than enough to convince analysts and market-watchers that the resurgence in the nation's core industrial sector is continuing into the second quarter.

Transportation Orders Are a Roller Coaster

And the reason analysts focus on that transportation-excluded three-month moving average? First, durable goods orders are subject to revisions: The longer time frame helps smooth out the errors. Second, transportation orders can be particularly volatile, as recent history demonstrates. Transportation equipment orders plummeted 13.1% in March, then surged 16.1% in April. In addition, non-defense aircraft and parts orders plunged 71.2% in March then skyrocketed 228% in April.

Also, April's 2.9% durable goods orders increase brought the top-line, three-month moving average to 1.1%. That's a tad low, but given the roughly half-year long uptrend in orders, and other manufacturing indicators, such as the Institute for Supply Management's Manufacturing Index, which confirm a manufacturing expansion, the 1.1% stat is not low enough to dispel the belief that a manufacturing rebound is under way, and helping to propel the economic recovery.

So far in 2010, rising exports and domestic business demand have been sufficient to drive increased production in the manufacturing sector, triggering increases in durable goods orders. But the key months are ahead: That's because the growth generators of fiscal stimulus and inventory rebuilding will decrease in impact, and continual monthly gains in employment will be needed to propel the recovery. The economy added an average of 260,000 jobs a month in the past two months, and if that pace of job growth continues, the U.S. recovery will become a self-sustaining expansion.