Headline durable goods orders came in significantly worse than anticipated, decreasing by 5.1%, where a fall of just 0.7% was expected. This follows a smaller decline of 0.5% in November. On a three-month moving average basis, orders are now 0.9% lower, following a 0.5% change in November. Meanwhile, orders excluding transportation were 1.2% lower, versus an expected -0.1% reading. Excluding defence, orders fell by 2.9%, following a 2.0% fall in November. Nondefence capital goods orders excluding aircraft and parts (the favoured proxy for business investment) were 4.3% lower after falling by 1.1% in November; these orders were 7.5% lower than in December 2014.
Inventories increased by 0.5% in the month, which follows five consecutive monthly declines. Unfilled orders decreased by 0.5%. Shipments fell by 2.2% and are 2.6% lower than a year ago. Large swings in transportation orders continue, with civilian aircraft and parts orders slipping by 15.0% in December after falling by 8.1% in November. Defence aircraft and parts orders were 34.4% lower after rising 45.8% in the previous month. There were only three major sectors that increased orders: primary metals; electrical equipment, appliances, and components; and other durable goods.
This month’s fall in orders was very likely to due to the sharp drop in shipments and the (very likely) involuntary increase in inventories. The inventory-to-shipments ratio is now at 1.69 from 1.64 in November. Unfortunately, the story does not seem to have changed much, in that manufacturing companies are still suffering the ill effects from the soaring dollar, the collapse in commodity prices, and the related slowdown in demand from the emerging markets. The result has been a very sharp build-up in inventories, which evidently companies continue to have difficulty bringing back down. The rhetoric we have heard from many of the industrials companies recently, via our William Blair analysts, suggests that the near-term outlook is still not particularly brilliant.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.