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Aircraft Nosedive Durable Goods
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New Orders for Durable Goods fell by 1.3% in March, well below expectations for an increase of 0.1%. Offsetting this were positive revisions to February, where new durable goods orders are now estimated to have risen by 1.1% instead of the original estimate of 0.9%.
More important was the source of the miss. It all came from the incredibly volatile area of non-defense aircraft. If transportation equipment orders are excluded, then new orders rose by 2.8%, far above the 0.7% expected rate. Orders for goods other than Transportation were also revised up sharply for February, to an increase of 1.7% from 1.4%.
So orders for non-defense aircraft are quite volatile. As Johnny Carson might have asked, "How volatile ARE they?" In March they were down 67.1%, which sort of makes it sound like Boeing (BA - Analyst Report) is going out of business, until you consider that in February non-defense aircraft orders rose by 32.7% and in January they shot up by 134.9%. These are month to month changes that can give any analyst airsickness.
Year-to-date, non-defense aircraft orders are running 71.6% above the levels of a year ago, so no, Boeing, and makers of smaller aircraft like Textron (TXT - Analyst Report) are not hurting overly much -- it is just that the orders tend to be very lumpy from month to month. Aircraft are also very expensive, so a few more or fewer 787’s ordered this month can have a very big impact on overall orders.
Aerospace firms also tend to get a fair amount of work from the Pentagon, and orders from Defense aircraft rose 2.0% after a 20.6% plunge in February, which reversed a 17.3% rise in January. Year-to-date, orders are up 21.4%.
In other words, if you want to filter out the noise, focus on the numbers excluding Transportation orders, or at least look at a longer time-frame than just a month in looking at Transportation orders.
Best Proxy for Equipment Sales
One subcategory that is of particular interest is new orders for non-defense capital goods excluding aircraft (NDCGxA). While that sounds like sort of cherry-picking, it is not. It is the best proxy for business investment in equipment and software, which is a vital part of the GDP calculations.
NDGCxA rose by 4.0% in March over February, on top of a 2.1% increase in February over January. However, NDCGxA fell 4.4% in January and on a year to date versus a year-ago basis, orders are up 9.4%. It looks like we are seeing an acceleration of business investment.
Orders for Machinery were up 8.6% in March on top of a 6.9% increase in February but a 9.9% decline in January and are up 11.7% on a year-to-date basis. This is extremely encouraging, especially considering that the nation’s factories are only running at 70% of capacity. A more normal level of factory utilization is 80%, and while manufacturing capacity utilization is up from 65.2%, it is still at a level only seen at the very worst points in previous recessions.
To be investing heavily in new machines when apparently so many are sitting idle indicates a lot more confidence on the part of companies about capital spending. A similar pattern can be seen in orders for computers, which saw a 12.9% rise in March on top of a 4.6% increase in February, but those were making up for a tough January when orders dropped 10.6%. On a year-to-date basis, orders are up 10.5%.
Clearly the surge is good news for both the computer firms like Hewlett-Packard (HPQ - Analyst Report) but also for the makers of chips that go into them like Intel (INTC - Analyst Report) and component manufacturers like Western Digital (WDC - Analyst Report).
While the headline on this report might have been ugly, the contents of it were looking pretty good. I would rate this report as a solid positive for the economy and more evidence that the recovery is starting to pick up some steam.
More important was the source of the miss. It all came from the incredibly volatile area of non-defense aircraft. If transportation equipment orders are excluded, then new orders rose by 2.8%, far above the 0.7% expected rate. Orders for goods other than Transportation were also revised up sharply for February, to an increase of 1.7% from 1.4%.
So orders for non-defense aircraft are quite volatile. As Johnny Carson might have asked, "How volatile ARE they?" In March they were down 67.1%, which sort of makes it sound like Boeing (BA - Analyst Report) is going out of business, until you consider that in February non-defense aircraft orders rose by 32.7% and in January they shot up by 134.9%. These are month to month changes that can give any analyst airsickness.
Year-to-date, non-defense aircraft orders are running 71.6% above the levels of a year ago, so no, Boeing, and makers of smaller aircraft like Textron (TXT - Analyst Report) are not hurting overly much -- it is just that the orders tend to be very lumpy from month to month. Aircraft are also very expensive, so a few more or fewer 787’s ordered this month can have a very big impact on overall orders.
Aerospace firms also tend to get a fair amount of work from the Pentagon, and orders from Defense aircraft rose 2.0% after a 20.6% plunge in February, which reversed a 17.3% rise in January. Year-to-date, orders are up 21.4%.
In other words, if you want to filter out the noise, focus on the numbers excluding Transportation orders, or at least look at a longer time-frame than just a month in looking at Transportation orders.
Best Proxy for Equipment Sales
One subcategory that is of particular interest is new orders for non-defense capital goods excluding aircraft (NDCGxA). While that sounds like sort of cherry-picking, it is not. It is the best proxy for business investment in equipment and software, which is a vital part of the GDP calculations.
NDGCxA rose by 4.0% in March over February, on top of a 2.1% increase in February over January. However, NDCGxA fell 4.4% in January and on a year to date versus a year-ago basis, orders are up 9.4%. It looks like we are seeing an acceleration of business investment.
Orders for Machinery were up 8.6% in March on top of a 6.9% increase in February but a 9.9% decline in January and are up 11.7% on a year-to-date basis. This is extremely encouraging, especially considering that the nation’s factories are only running at 70% of capacity. A more normal level of factory utilization is 80%, and while manufacturing capacity utilization is up from 65.2%, it is still at a level only seen at the very worst points in previous recessions.
To be investing heavily in new machines when apparently so many are sitting idle indicates a lot more confidence on the part of companies about capital spending. A similar pattern can be seen in orders for computers, which saw a 12.9% rise in March on top of a 4.6% increase in February, but those were making up for a tough January when orders dropped 10.6%. On a year-to-date basis, orders are up 10.5%.
Clearly the surge is good news for both the computer firms like Hewlett-Packard (HPQ - Analyst Report) but also for the makers of chips that go into them like Intel (INTC - Analyst Report) and component manufacturers like Western Digital (WDC - Analyst Report).
While the headline on this report might have been ugly, the contents of it were looking pretty good. I would rate this report as a solid positive for the economy and more evidence that the recovery is starting to pick up some steam.
Read the full analyst report on BA
Read the full analyst report on TXT
Read the full analyst report on HPQ
Read the full analyst report on INTC
Read the full analyst report on WDC
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