August Durable Goods: Weaker New Orders, Rising Backlogs And Heavy Inventories

By: José Torres Senior Economist at Interactive Brokers

August durable goods orders declined 0.2 percent from the July level, stronger than expectations of a 0.4 percent drop and a weaker reading from July’s -0.1 percent. August’s read is the lowest since February of this year and the second consecutive month of decline. Unfilled orders and inventories continue to increase, the former rose for twenty-four consecutive months while the latter rose for nineteen consecutive months. Shipments were strong on the other hand, up 0.7 percent during the period and up in fifteen of the last sixteen months. New orders for nondefense capital goods excluding aircraft, a proxy for business investment, rose strongly to 1.3 percent during the period.

New orders for large nondefense aircrafts and parts led the headline decline at -18.5 percent from the July level. Also contributing to the decline in new orders, fabricated metal products fell 0.7 percent during the period. Leading the strength in new orders were defense capital goods at 10.1 percent. Computers and electronics products also experienced strong gains at 0.8 percent while the electrical equipment, appliances, and components segment, motor vehicles and parts, machinery and primary metals also contributed to gains in new orders. 

Unfilled orders, a proxy for work backlogs grew in defense at 1.1 percent, in machinery at 0.5 percent and in communications equipment at 0.4 percent. Progress in the unfilled order segment was experienced in the computers and related products category at -0.7 percent, and more modestly in the other segment and in motor vehicles and parts. Shipments were generally strong across the board with exceptions in communications equipment and fabricated metal products which fell 2.1 percent and 0.6 percent respectively.

Overall, demand in the economy is slowing while production is still facing many challenges. Unfilled orders continue to rise as the industrial sector continues to face supply chain disruptions and shortages in materials and in labor. Rising inventories and declining new orders point to declining demand, as buyers stop ordering and sellers can’t move goods fast enough. The strongest point in the report was the rise in business investment, as industrial companies continue to invest and pour money into their businesses. This is positive for GDP and points to a strong labor market as businesses continue to have an appetite for growth and expansion.  

The August durable goods report is negative for 3rd quarter GDP prospects but mildly positive for inflation. Less demand means businesses don’t have as many customers to sell to, which leads to softening price pressures. Rising inventories also point to businesses holding too many goods that they’d like to sell. Again, leading to price pressures softening as they increasingly reach a level of inventory that is uncomfortable and leads to falling prices as a strategy to lure customers in and rid themselves of excess inventory. We’re seeing evidence of the inputs to durable goods, commodities, fall across the board. Whether it’s crude oil, natural gas, copper, metals, wheat, they’re all significantly off their highs because inflation is slowing down as demand slows down. A continued slowdown is needed for the Fed to reach their 2 percent inflation target and take their foot off the brakes. Unfortunately, the bulk of the inflationary pressure is coming from services and not goods, while wages and rents remain the primary drivers.  

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Disclosure: The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the ...

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