A Strong Surprise for August Durable Goods Orders

At first glance, August's 1.3% drop in durable goods orders looks like a decidedly downbeat report. However, the real story is that the more-telling component that excludes volatile transportation orders rose 2%, doubling a Bloomberg survey's consensus estimate. And Wall Street took immediate notice of that, with the market leaping out of the gate today, up around 175 points in midmorning trading.

How volatile are transportation orders? Consider: They plunged 10.3% in August after rising 11.6% in July, and dipping 1.1% in June.

August's transportation component decline was in large part due to a substantial drop in orders at airplane manufacturer Boeing (BA). Another transportation stat that speaks to the component's volatility: Overall nondefense aircraft and aircraft-parts orders plummeted 40.2% in August, after surging 69.1% in July.

Widespread Increases

Strip away the transportation data and August's durable goods orders report reveals several bright spots in the nation's industrial core. Machinery orders rose 3.9%, computers by 3.8%, primary metals climbed 2.4%, fabricated metal products rose 1%, electrical equipment increased 0.5% and all other durable goods edged 0.1% higher.

On the downside, manufacturing orders fell 1.1%, and capital goods orders declined 0.9%.

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A Bloomberg survey had expected August durable goods to fall 1%, after a revised 0.7% gain in July, up from the initially reported 0.4% July gain and a 0.2% decrease in June. That same survey also expected the ex-transportation component to increase 1% in August.

Durable goods orders are new orders by stores and businesses for immediate and future delivery of factory hardgoods. 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.

It's a key statistic for Investors because rising durable goods orders usually indicate that businesses are experiencing strong demand, which usually translates into higher revenue and increased production -- two bullish signs for the U.S. economy.

Modest Demand Across the Industrial Sector

Overall, August's durable goods orders report is a qualified positive for the U.S. recovery. On the one hand, the 1.3% decline in the top-line stat provides further confirmation that the pace of growth in the industrial sector generally slowed this summer.

On the other hand, the much-better-than-expected 2% gain in the ex-transportation component indicates that much of the industrial slowdown can be attributed to the volatile aircraft segment. Modest demand still exists for core industrial durable goods.

And if aircraft orders rebound this fall, that should be enough to keep durable goods orders heading higher at a better-than-adequate pace, something that's critical for GDP growth, given that manufacturing has so far led the expansion.