Durable Goods Report Signals Improving Trends Going Forward

By July 29, 2009Economy, General

The Commerce Department reported today that new orders for durable goods declined by 2.5 percent in June, after rising in April and May.

At first glance, today’s report was a setback.  However, much of the decline in new orders was due to the volatile transportation sector.  Excluding transportation, new orders rose 1.1 percent last month, marking the second consecutive monthly increase and the best performance since February.  Driven mainly by new orders for machinery, where orders were up for a third consecutive month in June, today’s report is an early signal that demand for big-ticket manufactured products is starting to stabilize heading into the third quarter.

The other piece of good news in today’s report is that manufacturers are finally starting to work off excess inventories that were built up during the second half of last year. Today’s report showed that inventories fell by 0.9 percent in June. This marks the third time in the past five months that inventories fell faster than shipments.  Working off excessive inventories is a critical ingredient for a turnaround in manufacturing production going forward and today’s report is good news on that front.

On the negative side, today’s report also showed that shipments of nondefense capital goods fell at an annual rate of 19 percent in the second quarter.  While this is beter than the 28 percent decline during the first quarter, it nonetheless indicates that both business investment and goods exports, which are dominated by capital goods, will likely be negative contributors to growth when the Commerce Department reports second quarter GDP on Friday.      



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