Diary of a Financier

Capital goods & inventories: Where’s the turn higher?

In Economics on Mon 26 Aug 2013 at 11:21

I wanted to update what I’m seeing in key macroeconomic data, specifically inventories and capital good spending after today’s durable goods report missed expectations.

The pickup in inventories is a key tenet in my bullish posture right now. From business to manufacturing, inventories have really waned on a y/y basis [expectedly]. Manufacturing inventory growth just dipped into contraction in June’s latest available report, and business inventories have pared gains too, continuing to fall back down to a slow growth clip. Particularly in the business sector, inventory/sales ratios remain in a historically low range first entered in 2006. That’s perhaps a testament to the constructive “technology revelation,” as I’ve called it. If anything, these low readings give spending some room to run:

Inventories (y/y %chg) & Inventory/Sales ratio- Business & Manufacturing

Inventories (y/y %chg) & Inventory/Sales ratio- Business & Manufacturing

This morning, the US Commerce Department reported durable goods data for July, with orders surprising to the downside, -7.3% m/m vs -4.0% expected. However, on an annual basis, total durable goods orders remain +3.3% y/y, with core orders (ex-transportation) +2.5% y/y. Core capital goods orders were -3.3% m/m but continue their surge, +8.4% y/y with shipments remaining +0.8% over the same period.

CapEx has been pathetic during the post-crisis recovery, something I’ve discussed at length and [again] attributed to the changing economy’s technological renaissance, which has led to efficiency gains and increasing competitive advantages. (That’s why the US government’s BEA justifiably revised the GDP formula to incorporate technology and other intangible expenditures in the calculation.)

Accordingly, I don’t think we need a material pickup in CapEx to push economic growth higher; we just need it not to collapse and drag on GDP. After today’s report (with the latest available data from July), capital goods shipments are on the brink of contraction y/y, but new orders have started surging:

Capital goods- new orders & shipments (both $M & y/y %change)

Capital goods- new orders & shipments (both $M & y/y %change)

ZeroHedge’s Tyler Durden points-out that there’s always the potential for cancelled orders. Of course that could happen, but I doubt it, because the pickup in railtraffic that has persisted since the last week of July shows some followthrough, telling me that renewed demand for capital goods is real, with a potential for rebuilding inventory stocks too. If shipments affirm the narrative I’m weaving, it’d be a big economic bonus, in my opinion.

The next checkpoint on the macro calendar is August’s ISM/PMI report on the first business day of September. That data should contribute more to this narrative, as it will give us a better idea of the manufacturing sector’s outlook.


  1. Update…

    August US ISM & global PMIs released between 9/1-3, and were fantastic, confirming the thesis above.


  2. […] and new orders (58.3 to 63.2) & production (65 to 62.4) both carrying-the-day. [Previously: Inventories, Capital Goods shipments & new orders] [Big global risk-on rally ensues, but faded throughout day on US Congressional talk of Syria; […]

  3. […] steady growth from China (22% of sales). [#Null hypothesis to the "Durable Goods pent-up demand" thesis I've been riding all year, which railtraffic seems to be affirming as we speak–although exuberant […]

  4. […] pounded-the-table (I, II, III & IV) on the US durable goods theme all year, but I grew wary of it by Q3-end, since valuations got […]

  5. […] only have shipments failed to verify Q3′s spike in orders–a confirmation I’ve awaited since late-August–but they’ve also failed to maintain positive growth.  In addition, […]


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