Volatile Durable Goods Data Sends Equities South

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New orders for durable goods sent stocks into retreat on Friday as the report tumbled well beyond expectations in August. But analyst reactions to the report were mixed as the headline was mostly a reflection of the overweighted transportation sector, which plummeted in August do to the volatile aircraft component.

New orders fell 2.4% in August, reversing course from the 4.8% gain in July and failing to match forecasts for a 1.0% gain. The transportation sector was the key factor as it fell 9.3% compared to July, mostly owing to the 29.9% plunge in aircraft orders. When transportation is excluded, orders were still in decline, but only slightly.

Shipments fell 1.4%, erasing much of the 2.2% gain in July. Inventories fell 1.3%, marking the eighth consecutive month of decreases and indicating that overhang reduction is not moderating. Worse, non-defense capital orders plummeted 7.1% in the month, and non-defense capital goods orders excluding aircraft, a proxy for  overall business investment, fell 0.4% in the month.

On the other hand, TD economist Millan Mulraine pointed to “meaningful growth” in the report including orders for primary metals (up 1.9%), machinery (up 0.7%) and fabricated metals (up 0.8%). “These are the basic building blocks for an eventual economic recovery,” he added.

On the whole, Mulraine said he was “inclined to be slightly more optimistic on the state of U.S. capital expenditures than the dire headline print from the durable goods report would suggest.”

Other analysts were also pretty upbeat given the broader trends in the economy, especially when keeping in mind the infamous volatility of this report.

“While this report is obviously disappointing it should be weighed appropriately given its volatility from month-to-month and its proneness to revision,” said the team at RDQ.  “We judge these data by the three-month trend in orders relative to the 12-month trend and we see encouraging gains from a recovery perspective in most major industries.”

A more comprehensive look at durable goods will be available Oct. 2 in the Factory Orders report.

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