Implications: New orders for durable goods slipped 1% in May. However, cutting through the monthly volatility, we see an acceleration in business investment. The US military ordered a boatload of submarines in April (yes, bad pun intended). As a result, overall orders increased 0.8% in April despite a decline of 0.8% outside the defense sector. Without this large order in May, the figures reversed, with overall orders declining 1%, but up 0.6% excluding the defense sector. As the table below shows, ex-defense orders are up at a 12.1% annual rate in the past three months versus a 2.2% gain in the past year. Orders for primary metals, fabricated metals, computers/electronics, and autos have all accelerated. Some of this acceleration is likely an offset to weakness we had this winter, but some of it also reflects a growing backlog of orders. Unfilled orders are up at a 9.7% annual rate in the past three months and up 7.9% versus a year ago. Shipments of "core" capital goods, which exclude defense and aircraft – a good proxy for business equipment investment – increased 0.4% in May, and are up at a 9.1% annual rate in the past three months. We are on the cusp of a large increase in business investment over the next couple of years. Consumer purchasing power is growing and debt ratios are low, leaving room for an upswing in appliances. Meanwhile, profit margins are still high, corporate balance sheets are loaded with cash, and capacity utilization is near long-term norms, leaving more room (and need) for business investment.
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Posted on Wednesday, June 25, 2014 @ 10:29 AM
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