Durable goods orders rose by 4.5% in August, fueled by aircraft and defense orders. That followed a 1.2% drop in July and overwhelmed market expectations for a 2.0% gain. Core capital goods orders and shipments continue to point to equipment spending moderating from the impressive pace of 2017.
The details of the report were not nearly as impressive when it comes to the near-term outlook for business spending, but point to continued growth in equipment spending and significant contributions to Q3 GDP from government spending and inventories.
Moreover, orders excluding transportation — a more accurate reading of underlying demand — advanced at the slowest pace in over six months, a sign that economic conditions are set to moderate, says Tim Mahedy of Bloomberg Economics.
Total orders were lifted by a 69% increase in the volatile aircraft segment, while defense orders surged 44%. The jump in defense orders bodes well for government spending in the third quarter. Only a fraction of the gain stemmed from defense aircraft, which like private aircraft orders, have a lengthy lead time between when orders are placed and when the goods are delivered and therefore counted in GDP. Defense capital goods shipments rose 1.2% over the month, which supports our call for government purchases to strengthen in the third quarter.
Excluding transportation, orders edged up only 0.1% as vehicle and parts orders fell 1.0%. Nondefense capital goods orders ex-aircraft fell 0.5%, although that followed a 1.5% gain in July.
Q3 Equipment Spending Still at Risk of Slowdown
With two months of data on shipments now available for the quarter, third quarter equipment spending is coming into view. Nondefense capital goods shipments, which feed into the BEA’s estimates for real equipment spending, rose 3.0% in August. The gain only partially reversed the 4.1% drop in July. Nondefense capital goods shipments are running at a 4.4% three-month annualized pace and suggest that without another jump in September, equipment spending will clock a similar pace to Q2 (4.6%), which was the slowest gain in a year and a half.
New orders still provide some reason to expect that shipments can gain more ground in the current quarter. Although core orders fell in August, the three-month average annualized rate continues to grow at a double-digit pace. The regional Fed manufacturing surveys thus far for September also point to orders holding up. A simple average of the Philadelphia, New York, Richmond and Dallas new orders components rose 2.7 points in September and remains near cycle highs.
Sizeable Lift from Inventories Still on Track
Inventories still look on track to boost Q3 GDP as well. Although durable goods inventories fell in August, they are up 1.2% from the second quarter average. We currently have penciled in a $30 billion annualized build in total real inventories for Q3. While that is well below the expansion’s average quarterly increase of $52 billion, it would be enough to add about 1.5 percentage points to GDP after inventories contracted in Q2.
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