Headline durable goods orders came in much higher than anticipated, increasing by 3.4%, where a rise of just 0.5% was expected. This follows an increase of 1.9% in March. On a three-month moving average basis, orders are now 0.6% higher, following a 0.8% change in March. Meanwhile, orders excluding transportation were 0.4% higher, versus an expected 0.3% reading. Excluding defence, orders increased by 3.7%, following a 0.6% fall in March. Nondefence capital goods orders excluding aircraft and parts (the favoured proxy for business investment) were 0.8% lower after falling by 0.1% in March; these orders were 5.0% lower than in April 2015.
Inventories were 0.2% lower in the month, which is the fourth consecutive monthly decline and the 10th in the last 12 months. Unfilled orders rose by 0.6%. Shipments also increased, by 0.6%, and are 0.8% lower than a year ago. Large swings in transportation orders continue, with defense aircraft and parts orders shooting up by 64.9% in April after falling by 2.0% in March.
This month’s increase was largely due to a jump in civilian aircraft orders, where the core capital goods order, which exclude defence and aircraft and parts, suggest that activity is still pretty soggy. These orders have fallen for the last three consecutive months and in five of the last six months. Similarly, while companies have been desperately trying to destock inventory for the last year now, they have been losing the battle against falling sales. The has been particularly true for nondurable goods as opposed to durable goods inventories. In April, some progress was made on the inventory-to-sales ratio for durable goods, whereby it fell from 1.67 to 1.65; though this is still high by historical standards and surveys from small businesses suggest they are still very dissatisfied with current levels. Companies are still being adversely impacted by the fallout from the drop in commodity prices, in conjunction with the still strong dollar and weak global economy. While the Fed has seen another window open up in which there is a possibility to raise interest rates, and it clearly does not want to pass this opportunity up, we continue to see an economy that is growing at a moderate, but not overly inflationary pace, where the risks of tightening too soon are still higher than at least waiting until you see the ‘whites of inflation’s eyes.’
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.