The Advance Report for durable goods came out today with most MSM reporting that it was up 1.1% in May. As usual they missed the real news. Markit didn’t: “Durable Goods Orders Show Steepest Three-Month Fall For Three Years.” As they put it:
Orders for durable goods showed a surprisingly strong increase in May, but over the last three months orders have fallen at the fastest rate for three years, signalling a worrying downturn in underlying demand for US goods.
Durable goods orders rose 1.1%, much better than economists’ expectations of a 0.4% rise and a welcome return to growth following two months of falling orders in March and April. However, growth was driven by a strong rise in orders for transportation goods, excluding which orders rose a weaker than expected 0.4%.
Furthermore, the monthly data are volatile, and a better understanding of the underlying trend can be ascertained from the change over the last three months, which showed orders dropping some 3.8% in the three months to May compared to the previous three month period. That was the steepest decline since May 2009. Even after excluding transportation goods, orders were down 1.2% in the latest three months, which was also the largest fall for three years.
Durable goods represent a major part of the manufacturing sector’s output, so the data bode ill for second quarter economic growth and the outlook for the second half of the year. Markit’s flash PMI showed manufacturing growing at the slowest pace for 11 months in June, with growth of new orders hitting a four-month low, due largely to the first fall in export orders for eight months. The crisis in the Eurozone is clearly having an increasing impact on global trade, with weakened demand across the troubled region hitting orders for US exports. However, demand is also withering in emerging markets such as China and Brazil, leaving the domestic market as the main source of growing demand for US goods.
This is the trend we would expect to happen at this time. The decline in new orders (3.8%) is the most telling statistic here. The pipeline is starting to shrink.