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What Do Durable Goods Orders Say About GDP Tomorrow?

June durable goods orders increased just 1.0 percent, falling short of a consensus expectation of a 3.0 percent rise. But get under the hood of this report, and the engine of the factory sector is still running fine.

Aside from Softness in Aircraft, Orders Strengthening

It may have been a miss on the headline for durable goods orders with just a 1.0 percent increase in June, but the miss can be attributed, at least partially, to the fact that civilian aircraft orders were decidedly underwhelming.

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Defense aircraft orders were up 20.2 percent in the month, but non-defense orders, which are almost three times larger, were only up 4.3 percent. After back-to-back declines in the preceding months, a bigger bounce for orders of non-defense aircraft might have lifted the headline figure higher.

Elsewhere on the transportation side of things, orders increased. Transportation-related equipment orders were up, and motor vehicles and parts orders increased 4.4 percent, nearly reversing a decline of 4.5 percent in the prior month.

Stripping out the notorious volatility of the transportation sector, durable goods orders were up 0.4 percent versus a consensus expectation of 0.5 percent. Technically, that’s a miss, but a revision to May’s extransportation number pushed the initially-reported 0.0 percent pick-up to a gain of 0.3 percent.

After taking revisions into account, we call that a better-than-expected print for ex-transportation orders. In fact, aside from the flub from aircraft, today’s report is the latest indication that our expectation for moderate expansion in the factory sector remains on track.

What Does Today Tell Us About Tomorrow?

Tomorrow morning, financial markets will digest the first estimate of GDP growth for the second quarter, and there are some clues in today’s durable goods report and a separate report on wholesale inventories as to what we can expect.

The signals on inventories were negative on balance. Wholesale stockpiles were unchanged in June, despite expectations of a 0.3 percent increase. Inventories at durable goods manufacturers actually declined 0.1 percent in June. Our expectation for tomorrow’s GDP report is that inventories will add 0.4 percentage points to the headline growth rate. In light of this latest data, there is some risk that the boost from inventories will be smaller.

On the plus side, shipments of core capital goods, which tend to be a good barometer for equipment spending, increased 1.0 percent in June, which handily beat the 0.4 percent gain that had been expected by the consensus. Meanwhile, orders for this core capital goods series increased 0.6 percent on the heels of an upward revision to May’s data. Taken together, these numbers suggest some upside to our call for a 5.1 percent pace of growth in equipment spending.

Our above-consensus call for tomorrow’s GDP report is 4.7 percent, which, if realized, would be the fastest pace of economic growth since 2014.

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