Headline durable goods orders came in slightly better than anticipated, decreasing by 0.7%, where a 1.5% decline was expected. This follows an upward revision to March’s figure of 2.3%r (0.9%). On a three-month moving average basis, orders are now 1.0% higher, following a 1.3% increase in March. Meanwhile, orders excluding transportation were 0.4% lower, and below the anticipated 0.4% increase. Excluding defence, orders decreased by 0.8%. Nondefence capital goods orders excluding aircraft and parts (the favoured proxy for business investment) were flat for a second consecutive month; these orders were 2.9% higher than in April 2016.
Inventories were 0.1% higher following a 0.2% increase. Unfilled orders were 0.2%. Shipments fell by 0.3%, and are 2.8% higher than in 2016. Large swings in transportation orders continue, with nondefence aircraft and parts orders falling by 9.2% and defence aircraft and parts orders rising by 7.1% in April.
We were slightly surprised and disappointed by the May 18 benchmark revisions to the report, which shows that the inventories-to-sales ratio is now much higher than was previously believed. Before revisions, the I/S ratio had just about managed to return to the ‘new-normal’ levels, instead, we are now told it has been revised back up to levels that would likely be considered too high by many manufacturers. Looking into I/S ratios by industry, the evidence points to a very high ratio for construction and building materials, a run-up in the ratio for the defence industry, a higher ratio for consumer durables, and an above-average rate for autos. Conversely, the I/S ratio for computers and related products is the lowest since the series started in 1992, as (just about) is the ratio for nondefence capital goods. While some of this might be related to the ‘transitory’ weakness in consumer spending through the first quarter (which today was revised upward), some of it (such as auto sales and perhaps construction) might be a little stickier. It is something to watch out for, and it puts a bit of dampener on expectations for manufacturing activity in the coming months.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.