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US: Big Old Jet Airliner, Don’t Carry Me Too Far Away

Durable goods orders fell 1.7 percent in July, a bigger drop than was expected. Aircraft orders accounted for most of the weakness though, with bookings off more than 34 percent in both civilian and military orders.

Otherwise a Mostly Good Report

Orders for durable goods at U.S. manufacturers fell 1.7 percent in July, as a slip in monthly orders previously reported at Boeing presaged the drop of more than a third on both the defense side and the civilian side. Shipments of civilian aircraft were down again, and defense aircraft shipments were up; both developments here in July are in-line with recent trends (top graph).

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When you strip away aircraft orders, there was fairly broad-based strength, but that is not to say that we can safely look past the weakness. In its initial estimate of equipment spending for GDP, the BEA includes aircraft and that means for this July print (the first month of the third quarter), we are not starting the quarter on a good note. We need to see a strong bounce-back in nondefense shipments (especially aircraft) in August and September to save the quarter for equipment spending. With orders in other categories still mostly positive and unfilled orders of nondefense aircraft still elevated, we maintain our call for real equipment spending to rise in Q3.

Business spending on new capital equipment was a significant driver of economic growth at the start of this long expansion, but a drop in oil prices in mid-2014 was quickly followed by spending cuts from late 2014 through early 2016. More recently, equipment spending has seen consistent, if somewhat underwhelming, growth.

For nine consecutive quarters, cap-ex on equipment has been positive in the GDP report, but the annualized growth rate has not broken into double digits on a percentage growth rate basis during that period. For comparison, in three out of four quarters in 2010, equipment spending grew at an annualized rate of 23 percent or faster.

Forward-looking measures of business spending, like orders for core capital goods, which are now growing at a 10.8 percent three-month annualized pace, suggest that any soft patch in Q3 spending may be short-lived.

Help from Inventories?

Another potential salve: inventories. The pace of inventory investment can occasionally be a major swing factor in the GDP report and the table is set for that to be the case here in the third quarter. Our current estimate for the annualized change in Q3 inventories is just $15 billion, a well-below trend number. But coming on the heels of a $27.9 billion drawdown in inventories in the second quarter, even that modest increase in Q3 is sufficient for inventories to add almost a full percentage point to headline GDP.

Inventories jumped 1.3 percent in July—the biggest one-month stockpiling event we have seen since 2011. As the saying goes, “one month does not a trend make,” but we will be eyeing the incoming inventories numbers with renewed interest. On balance, businesses are still contributing to growth, even at this late stage of the cycle.