This afternoon Fed chair Janet Yellen will be mindlessly yapping about
things like uncertainty but also about the strengthening economy. Meanwhile,
today’s durable goods report should give her something to think about.
Highlights
Orders proved very weak for the factory sector for a second straight month
in June, down 4.0 percent and outside Econoday’s low estimate. Core readings
are also soft with ex-transportation also lower for a second month, down 0.5
percent, with core capital goods (nondefense ex-aircraft) higher but up by
only 0.2 percent and following two straight prior declines of 0.5 and 0.9
percent.
Orders for civilian aircraft, which are always volatile month to month,
fell nearly 60 percent in June, offsetting for the transportation group a
solid 2.6 percent gain for vehicles. But vehicles are by far the best news in
the report with nearly all other sectors posting declines and some sharp
declines including computers, down 9.1 percent in the month, communications
equipment at minus 2.3 percent, and primary metals down 1.3 percent.
Total unfilled orders are a very serious negative, down 0.9 percent
following no change in May and suggesting that factories have been keeping
production up by working off backlogs which is a negative for future
employment. And factories did keep busy in the month as indicated by the
previously released industrial production report and by a 0.4 percent gain
for shipments in this report. A plus for employment is another draw in
inventories, down 0.2 percent and taking the stock-to-sales ratio down to
1.64 from 1.65.
Year-on-year rates reinforce the sense of weakness. Total orders are down
6.4 percent which outside of an aircraft-distorted 19 percent decline in July
last year is the weakest in 4 years. Ex-transportation orders are down a
year-on-year 3.6 percent with core capital goods down 3.7 percent which,
strikingly, is the 17th decline in 18 months — confirmation of weakness in
both domestic and global business investment. Shipments of capital goods,
which are inputs into the nonresidential fixed investment component of GDP,
fell 0.4 percent in June which is a second straight decrease and will not be
raising estimates for Friday’s second-quarter GDP report.
Anecdotal reports on the factory sector have been less negative than this
report, which however is a definitive report. And the monthly headline
decline in today’s report is the most severe since August 2014. The factory
sector may not be coming be alive as hoped going into the second half of the
year.
Recent History
Durable goods orders have been up and down and a 1.3 percent dip is
expected for June following a 2.3 percent drop in May. Capital goods data
have been a key weakness in this report, underscoring lack of business
investment in new equipment. Always a wildcard in this report is
commercial aircraft where orders have been showing some new life after
contracting earlier in the year. Vehicle orders have been only slightly
stronger. Ex-transportation durable orders are expected to make the plus
column, at 0.3 percent.
Layoff announcements by Honeywell and Boeing should have knocked the idea
that aircraft orders might show signs of life.
New orders are likely to remain weak given that existing orders are being
cancelled.
Manufacturing clearly remains in recession.
