Headline durable goods orders came in much stronger than anticipated, increasing by 4.8%, where a 1.7% reading was expected. This follows an increase of 0.4% in September. On a three-month moving average basis, orders are now 1.8% higher, following a 1.4% increase in September. Meanwhile, orders excluding transportation were 1.0% higher, compared to the expected 0.2% rise. Excluding defence, orders increased by 5.2%, following a 1.4% rise in September. Nondefence capital goods orders excluding aircraft and parts (the favoured proxy for business investment) were 0.4% higher after falling by 1.4% in September; these orders were 4.0% lower than in October 2015.
Inventories were unchanged for a second consecutive month. Unfilled orders increased by 0.7%. Shipments increased by 0.1%, and are 0.9% lower than the first 10 months a year ago. Large swings in transportation orders continue, with nondefense aircraft and parts orders soaring by 94.1% in October after rising by 30.3%.
This month’s increase was largely due to the sharp increase in orders for nondefence aircraft and parts, although the core capital goods orders, which exclude defence and aircraft and parts, were still fairly positive (up 0.4%). Some of this demand could be the result of the release of some pre-election pent-up demand, whereby the uncertainty caused companies to sit on their hands until after the election. If this is indeed the case, we should see some further strength in the coming months. While the level of inventories has been falling, the inventory-to-sales ratio remains high by historical comparison. In October it remained at 1.64 (though most of the excess seems to be on the nondurable goods side). Companies are still being adversely affected by the fallout from the drop in commodity prices, in conjunction with the still-strong dollar and weak global economy. This dollar strength now also looks like it will continue, at least in the very near term, following the Trump victory, while commodity prices may stay low if there is a sharp decline in energy sector regulation that permits more exploration and production. The Trump election will help spur economic activity in the near term, and this helps make the Fed’s dots forecasts now seem a little more plausible than was previously the case.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.