Durable Goods Report - Orders Driven Down By Defense & Aircrafts

The October durable goods report was weak. This signals hard economic data is supportive of the recent correction in stocks. The headline matches the takeaway from this report. But the underlying results need to be examined. That one time crash in defense orders isn’t relevant in measuring the momentum of the economy.

New orders were down 4.4% month over month which missed estimates for a 2.5% decline. That’s pretty bad considering that the September reading was revised from showing 0.8% growth to a 0.1% contraction.

Excluding transportation, month over month orders were up 0.1% which missed estimates for 0.4% growth.

Again, this looks even worse because the September results were revised down from 0.1% growth to -0.6% growth. There should be stronger results than expected when the prior reading is revised down, if you’re looking at the data sequentially.

Instead, these misses signal there is a negative trend which is bad for Q4 GDP growth estimates. This report pushed the NY Fed’s Q4 GDP growth estimate down 4 basis points.

The latest estimate is 2.51% which would be a huge drop from Q3’s growth rate of 3.5%. Q3 GDP report will be updated on Wednesday. Consensus expects GDP growth to stay at 3.5%.

Headline durable goods report was weak because of the 59% decline in defense aircraft orders. This metric has been wild as it more than doubled in September. In the long run, it has been increasing.

It should do well under President Trump’s leadership. He wants to increase the defense budget. Civilian aircrafts have been sharply declining. They were down 21% and 19% in the past two reports.

Durable Goods Report - Core Orders & Shipments Signal A Slowdown Is Here

Core capital goods orders are what I follow to see the underlying trend in economic growth. Core capital goods orders were flat month over month. They missed the consensus for 0.3% growth. That’s a big miss since the September report was revised from a 0.1% contraction to a 0.5% decline.

The report looks better when you exclude aircrafts, but it’s still weak. Excluding aircraft and transportation equipment, orders were up 0.1% which missed estimates for 0.4% growth.

As you can see from the chart below, non-defense capital goods shipments and orders excluding aircrafts have seen weakening year over year growth in the past few months. Core orders and core shipments were up 3.4% and 4.3% year over year

This looks similar to the weakness in 2012 and 2014. The economy is officially in a slowdown. Now the only question is if it leads to a recession.

(Click on image to enlarge)

Durable Goods Report - Good & Bad Details Of The Report

Let’s get into some of the details of this report.

Orders for primary metals fell 2.3% and 1.2% in the past 2 readings. Tariff pre-buying has ended now that the tariffs on steel and aluminum have been in place for a while.

Orders for machinery fell 0.5% in October after increasing 0.1% and 0.2% in the previous 2 months. The core weakness in orders and shipments stems from machinery.

As you can see in the chart below, core capital goods shipment growth on a year over year basis is weakening.

Shipments were up 0.3% monthly. It’s debatable if the economy fell into a recession from late 2015 to early 2016. Either way, growth is going from great to good. The slowdown is here. A recession can follow if the Fed stays hawkish.

This chart aims to show that the weakness in non-residential business investment growth in Q3 wasn’t a blip. The trend should continue lower in Q4. GDP growth is reliant on the consumer. Meaning, it should be positive in Q4, but it is vulnerable to a negative reading in 2019.

The best parts of this report were quick order gains for electrical equipment, communications equipment, computers, and fabrications.

Durable Goods Report - Weakening Consumer Sentiment

One of the positive readings from the October leading indicators report was consumers’ expectations for the business environment.

Therefore, reviewing the November consumer sentiment report gives us an early look at when the leading indicators will stop growing. I expect growth to be negative on a year over year basis sometime in the 2nd half of 2019. With a recession occurring in the first half of 2020.

November consumer sentiment was 97.5 which missed estimates for 98.3. That’s down from 98.6 in October. This weakness isn’t enough to fear a recession in the next 6 months just yet.

Current conditions index fell 0.8 to 112.3 and the expectations index fell 1.2 to 88.1. The high difference between the current and expectations indexes have predicted previous recessions. As you can see, the spread increased in November.

Durable Goods Report - Existing Home Sales Beat Estimates

For the first time in 7 months, the existing home sales report beat estimates.

The October report came in at 5.22 million which beat estimates for 5.21 million and the September reading of 5.15 million. That was 1.4% month over month growth which was on top of a 3.4% decline last month. Year over year growth fell from -4.1% to -5.1%.

This report had some positive underlying metrics which might signal the weakness in housing is abating. Single family and condos had 0.9% and 5.3% monthly growth.

Year over year, they fell 5.3% and 3.2%. Even though the Midwest is the area with the most affordable housing, it was the only region with declining monthly sales as they fell 0.8%. Sales rose 1.9% in the south, 2.8% in the west, and 1.5% in the northeast.

Median prices fell 0.6% on a month over month basis which probably boosted sales. This weakness in prices will hurt inflation. On the opposite side of the spectrum, supplies fell 1.6% which means supply in relation to sales fell from 4.4 months to 4.3 months.

Sequentially this report was decent. If I thought the economy was going to accelerate, I would look for stabilization. However, since I’m looking for further slowing in 2019, I am not expecting intermediate term stabilization.

Median prices may fall year over year, breaking the 80 month streak.