Durable-Goods Orders Rose in June

By Robert Hughes

New orders for durable goods increased 2.0 percent in June following drops of 2.3 percent and 2.8 percent in May and April, respectively. If aircraft are excluded, new orders for durable goods increased 1.5 percent in June following declines of 0.2 percent and 0.9 percent. Durable-goods orders excluding aircraft are just 0.2 percent below the all-time high recorded in December 2018 (see top chart).

Within the report on new orders for durable goods are data on new orders for capital equipment, or business-equipment investment. This subcategory is particularly important for two reasons. First, business investment can have a major impact on future productivity trends, and productivity is critical for helping offset cost increases and raising living standards over the long term. Second, capital-goods orders are important as they tend to be early indicators of turns in the business cycle. Real new orders for core capital goods — that is, real nondefense capital goods excluding aircraft — is one of the indicators in AIER’s Leading Indicators index.

On a nominal basis, new orders for core capital goods rose 1.9 percent in June following a gain of 0.3 percent in May. The back-to-back increases put this category at a new record high. The broader trend, however, is essentially flat. Core capital-goods orders have peaked around the $70 billion level in each of the past two expansions (see bottom chart). With interest rates low and cash flow strong, the implication is that businesses are purchasing new equipment at levels deemed appropriate.

There is more to business investment than just equipment. Total nonresidential private fixed investment also includes spending on structures and investment in research and intellectual property. The bottom chart shows this broader measure continues to grow at a healthy rate.

The results for the categories of durable goods shown in the report were generally stronger in the latest month. All the categories shown had gains for the month except for computers and electronic products and defense aircraft. Comparing the first half of 2019 to the first half of 2018, the results are a bit more mixed, with three categories showing declines (primary metals, computers and electronic products, and nondefense aircraft) and six showing gains.

Other data out today include the latest weekly initial claims for unemployment. For the week ending July 20, claims totaled 206,000, down 10,000 from the prior week. The four-week average came in at 213,000 versus 218,750 in the prior week. Initial claims remain at historically low levels, suggesting the labor market remains very tight.

Today’s data are positive overall. The report on durable-goods orders suggests that demand remains relatively solid and that business-equipment investment is holding at a high level. The most likely path for the economy remains continued expansion, but caution is warranted given the high level of uncertainty surrounding trade, monetary, and fiscal policy.

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Robert Hughes

Robert Hughes joined AIER in 2013 following more than 25 years in economic and financial markets research on Wall Street. Bob was formerly the head of Global Equity Strategy for Brown Brothers Harriman, where he developed equity investment strategy combining top-down macro analysis with bottom-up fundamentals. Prior to BBH, Bob was a Senior Equity Strategist for State Street Global Markets, Senior Economic Strategist with Prudential Equity Group and Senior Economist and Financial Markets Analyst for Citicorp Investment Services. Bob has a MA in economics from Fordham University and a BS in business from Lehigh University.