Durable Goods Orders Soar
October orders exhibit resiliency, but gains may be short lived
October durable goods orders jumped by 1%, outpacing expectations, after a small downward revision to September, +0.3% versus the previously reported +0.4%. That is well above the consensus estimate for a gain of +0.4%.
Transportation orders accounted for half of October’s gain; ex-transportation, durable goods orders rose by 0.5%. Both civilian aircraft orders and motor vehicles and parts orders are befitting from pent-up demand and a catch-up in production; computer chip shortages suppressed production and inventories in the second half of 2021 and first half of 2022. Nondefense aircraft orders rose by 7.4% on the heels of a surge in Boeing orders; they reached 122 planes during the month after hitting 96 in September. Motor vehicles and parts orders rose by 0.6% in October as days’ supply of motor vehicles on dealer lots remains a woefully low 21 days whereas the pre-COVID norm was 60 days. Vehicle dealers would like to keep inventories tight but will not hesitate to build the minute their competitors have more selection on their lots.
Machinery orders rose by 1.5%, the biggest jump since the 3.3% increase we saw in January 2022. Computers and electronic equipment orders rose 0.4% but we saw much larger moves in the subcomponents of computers and related equipment orders (+4.7%) and communications equipment (+3.5%) the biggest increases for both since July 2022. New mainframes that enable more sophisticated AI (Artificial Intelligence) programs were introduced in the Spring and are surging. The move to support cloud computing is also significant. Meanwhile, primary metals and fabricated metals orders were little changed on the month.
Core capital goods orders, which exclude aircraft and defense orders and are a proxy for business plans, rose by 0.7% in October, beating expectations for no change. That is a nice rebound from the 0.8% drop we saw in September and suggests a tailwind for investment in the fourth quarter.
Core durable goods shipments, which feed directly into the business investment component of GDP, increased a robust 1.3% in October. Last month's contraction was revised to almost nothing after an initial 0.5% drop. As a result, real GDP growth now looks on track to post close to a 1% gain, which is still less than half the pace it was in the third quarter but represents better domestic demand than was expected. A sharp improvement in the trade deficit more than accounted for all of the gains to real GDP growth in the third quarter.
The data on actual manufacturing activity suggests the good news could be short lived. The S&P Global US manufacturing PMI fell to 47.6 for November from 50.4 in October. Looking deeper into the details, the new orders index lost even further ground, dropping to 45.0 in November from an already contractionary 46.7 in October. Anything below the 50 threshold suggests a decline in manufacturing activity. November’s PMI outcomes are the weakest since the COVID recession.
The orders data is exhibiting resiliency at a time when the Fed is trying to weaken economic activity to lower inflation. The gains we are seeing may be short lived but for the moment only affirm the Fed’s resolve to raise rates another half percent in December. There is a growing divide within the Fed over the pace and peak in rates beyond December. The outcome of those decisions will depend more on consumer spending and the resilience of the labor market, which provides the backbone of demand.