Fresh from the presses by JPM's Michael Feroli:

A disastrous durables report

The July durable goods report was a major disappointment and raises the risk that third quarter GDP growth prints below 1%. Shipments of core capital goods (ex-aircraft and defense) fell 1.5%, the most since April 2009, and orders for core capital goods plunged 8.0%, the most since January 2009. This category is the most important element of the report as it is the best gauge of business capital spending and it feeds into the calculation of GDP. Other aspects of the report weren't quite as bad: total orders were up 0.3%, which was entirely accounted for by a 76% jump in bookings of civilian aircraft. Total shipments rose a decent 2.2% in July, thanks mostly to an increase in shipments of semiconductors and other electronic intermediate inputs.



Core capital goods tend to be seasonally weak the first month of the quarter, due to excess seasonality in the machinery category. However, even after accounting for that the capital spending implications still look atrocious. In particular, new orders for machinery declined 15%, the most on record going back to 1992. There was a modest upward revision to June core capital goods shipments, which implies that second quarter GDP growth is now tracking 1.2% instead of 1.1%. However, even with that revision core capital goods shipments are tracking a 2% annual rate of decline early in Q3, down sharply from a +18% pace in Q2 and +12% rate in Q1. The downshift in the pace of capital spending is particularly worrying as this was the strongest, most reliable sector of the economy over the past year.



Inventories at manufacturers of durable goods increased $1.8 billion in July, well below the $3.3 billion average increase in stocks over the prior three months--another factor which lends downside risk to Q3 GDP growth.