Wednesday, June 25, 2008

Durable goods in May: Best to put optimism on hold

WAR! What is it good For? MFG!
The durable goods report is leaning heavily on the defense sector. Over three months shipments are off by 0.9% but are bolstered by defense shipments rising at a 28.3% annual rate. Defense orders have slowed over three months but are still up 32% over 12months. Defense is making the report look better.

Ex defense orders are lower in SEVEN of the past 10 months for a net drop of four percentage points. Over that same period new orders ex-defense are net lower by three percentage points.

Still, non-defense capital goods excluding the volatile aircraft component show strong shipments trends, firm orders and strong growth in unfilled orders. But the consumer sector shows withering results.

Since foreign economies are slowing we have to wonder how long before this industrial strength, derived in part from exports, holds up...

Meanwhile in the new quarter (two months into 2008-Q2), the growth rates for shipments and orders overall are negative, and are negative for orders and shipments excluding defense. But there is a persistent strength in unfilled orders that is reassuring. Let's not get too excited over the report but it is holding up quite well in the face of all the shocks... see table below

Durables Trends in new Quarter
Durable Goods (A-M)/Q1
Shipments -0.1%
New Orders -3.4%
Unfilled Orders 12.4%
Inventories 8.0%
Excluding Transportation
Shipments 8.2%
New Orders 11.6%
Unfilled Orders 9.9%
Inventories 5.9%
Excluding Defense
Shipments -2.4%
New Orders -4.1%
Unfilled Orders 15.5%
Inventories 7.7%
NonDefense Capital Goods
Shipments 3.6%
New Orders -3.9%
Unfilled Orders 19.8%
Inventories 13.6%
Growth rates Saar

On balance Q2 looks like a decent one for the factory sector. There still are a lot of irregularities. Sector trends could still turn lower and with a weakening global economy we should be wary of that. And also wary since a good amount that strength depends on defense sector activity. But for now the sector is holding up better than current industrial production and MFG surveys would suggest. Since those sources are a bit fresher than this report we should put the optimism on hold....

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