By Michael Englund
The U.S. durables data for July revealed the big headline orders gain that was expected, with a 1.7% overall rise following an upwardly revised June increase of 1.1%. However, the component data for the equipment sector fell short of expectations, and all the headline strength could be attributed to the anticipated surge in aircraft orders.
The nondefense capital-goods series revealed modest shipments gain of 0.6% and was held back by a hefty 19% drop in aircraft shipments. Yet, orders for nondefense capital goods soared by 9%, thanks to a surge in the aircraft component of capital-goods orders on the month. This reflected the 75 foreign plane orders at Boeing (BA ) in July that was likely dominated by Emirates Air. Excluding aircraft and parts, nondefense capital goods only rose 0.6% in July.
In one fell swoop, the aircraft statistics revealed a powerful cyclical turn, with a surge in unfilled orders that will give Boeing the elbow room it needs to set the bottom in aircraft production. Yet, the shortfall in the data outside the air-equipment area prompted a downward revision in our otherwise optimistic outlook for the equipment and software component of third-quarter gross domestic product (GDP), where we now expect "only" 8% real growth, following the 10% growth clip in the second quarter that will likely be bumped upward.
Equipment and software spending in the second-quarter GDP report to be released this Friday is still poised for a $1 billion upward bump. Factory inventories are still likely to be revised $1.8 billion higher, to a $5.5 billion accumulation rate. Business inventories overall in the second quarter have a much bigger accumulation rate that should exceed a $60 billion annualized pace.
Our second-quarter GDP estimate will remain at 2.7%, though we have bumped down our third-quarter GDP estimate to 4%. The 0.8% durable-goods inventory rise in July certainly supports the forecast of its continued strength, but the number fell marginally short of our assumptions.
Overall, the factory sector remains healthy, and the equipment and software component of GDP is poised for continued brisk growth. But part of the upside surprise that we predicted in the July durables report has now been pushed back to August, and this has shifted our forecast for third-quarter GDP downward.
Englund is chief economist for Action Economics