Durable Goods: Pretty Good

In September, new orders for Durable Goods (DG) rose by 1.0%, the up-leg of a recent seesaw pattern in this series. In August, DG orders fell by 2.6% following a 4.8% rise in July.

The results were comfortably ahead of the 0.5% consensus expectations. However, over the last year, the seesaw pattern has mostly been a declining staircase. On a year-to-date basis, DG orders are down 24.1%.

Much of the volatility in the sector stems from the Transportation sector, especially aircraft, since the gain or loss of a few 747 orders by Boeing (BA - Analyst Report) can offset lots of orders for washing machines or even machine tools. Excluding Transportation, it was an even stronger month relative to expectations, with a 0.9% rise versus just a 0.1% rise expected. This follows a decline of 0.4% in August and a 0.9% rise in July.

While the decline has been smoother, the year-to-date decline excluding Transportation is 21.4% -- not all that much better than the orders, including the volatile transportation series. If Defense orders are excluded, the increase was 0.5%, following a decrease of 2.6% in August and a 4.3% increase in July. So far this they are down 25.7%.

The 1.1% increase in Transportation equipment is almost startling at its low absolute value -- it follows a decline of 9.1% in July and an increase of 17.8% in August. So far this year, total new orders for Transportation equipment are down 31.7%.

The Transportation sector is broken out into three parts. Orders for motor vehicles, both passenger cars from Ford (F - Analyst Report) and big 18-wheelers from Paccar (PCAR - Analyst Report) edged down a slight 0.1% in September, following back to back increases of 1.6% and 1.9% in August and July, respectively.

The pig is probably through the python by now, as far as the rebuilding of inventory related to what was drawn down by the Cash for Clunkers program. Year-to-date, motor vehicle orders are down 28.8%. The real volatility in transportation comes from the Non-Defense Aircraft segment. It fell 2.1% in September, virtually a non-event after the 44.2% decline in August and the 98.1% increase in July.

The year so far has been an absolute disaster for the order books of Boeing -- and by extension, its big suppliers like United Technologies (UTX - Analyst Report) -- with orders down 61.8% so far. The Defense Aircraft segement can also be volatile. It posted a 12.5% gain this month following declines of 12.0% and 20.6% in August and July respectively. On a year-to-date basis, they are the only area of durable goods orders that are up.

Another key area to look at in the report is orders for Non-Defense Capital Goods, since it is a great proxy for business investment in equipment and software (a big part of the I in the GDP = C + I + G + [X-M] equation). They rose 2.5% in September following a 7.7% decline in August and a 7.0% increase in July. This implies a slight increase in E&S spending when the third quarter GDP report comes out tomorrow.

Year-to-date, orders for capital goods are down 28.9% as investment has slipped to a record low share of the economy. If aircraft are stripped out, the orders were up 2.0% for the month following declines of 0.8% and 1.3% in August and July, respectively. So far this year they are down 21.9%.

This is a solid report, but not one that blows the doors off. It supports the idea that the economy is starting to grow again, but at a pretty moderate pace. The year-to-date data remind us of just how deep a hole we have dug for ourselves, but at least we are starting to climb out. The walls of that hole are likely to be slippery, so don’t expect it to be easy.