Durable Goods Orders: Weak Gain in July Confirms Slowing Economy

The U.S. economy received another sign that the expansion has slowed. Durable goods orders rose just 0.3% in July -- substantially less than expected -- the U.S. Commerce Department announced Wednesday. A Bloomberg survey had expected July durable goods to rise 2.5% in July.

Equally significant, the more telling ex-transportation component, which excludes often-volatile aircraft orders and parts, plunged 3.8%.

One of the few bright spots in the current report was the revised June durable goods order statistic, which was adjusted to a small 0.1% decline, not as bad as the previously released 1% drop. Durable goods orders fell 0.7% in May.

Another bright spot: Shipments rose 2.2% in July, after rising just 0.2% in June and falling 0.7% in May. Also, excluding defense, durable goods orders rose 0.3% in July.

Industrial Core Slowed in Second Quarter

July's unexpectedly low gain in durable goods orders further confirms that economic expansion slowed in mid-2010. With July's ex-transportation decline, the three-month moving average for durable goods orders fell to a minus 0.2% -- a figure that further confirms a slowing recovery because the core industrial sector has led the expansion to date.

What's more, July's 0.3% durable goods orders rise would have been lower were it not for a strong performance by orders for non-defense aircraft orders and parts, which skyrocketed 75.9%, and by transportation equipment, orders for which jumped 13.1%.

Other, key durable goods orders categories showed disappointing results. Machinery orders plunged 15%, appliances declined 5.9%, capital goods decreased 2.7%, computers and electronic products fell 2.4%, defense capital goods decreased 2.2%, and fabricated metals declined 1%. On the positive side, communications equipment orders rose 3.9%.

Demand Indicator

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 manufacturing production -- two bullish signs for the U.S. economy.

July's durable goods order report was an unqualified disappointment: The data further confirms that demand for industrial products declined in mid-2010 nearly across the board.

Slowdown Increases Pressure on Fed

Further, if the factory slowdown continues -- and no other dimension of the U.S. economy (such as business investment, exports, or consumer spending) replace that commerce activity -- that would increase the probability of a double-dip recession.

The factory slowdown also increases the probability that the Federal Reserve will maintain its accommodative monetary policy, including quantitative easing, that's designed to stimulate the economy. The Fed may also deploy additional tools to increase demand in the world's largest economy, which is currently operating well below potential and appears to be close to stalling.