I’ve had a string of posts discussing US capital goods and inventories, which are crucial for a continuation of the domestic recovery. I’ve observed that some of our low CapEx post-crisis is a result of technological advances. Nevertheless, a look at specific capital and durable goods reveals pockets of chronic neglect. Today, the US Commerce Department reported October durable goods, so I wanted to chime-in with some commentary on this important checkpoint for the economy and capital markets…
Total orders were soft (-2% m/m, in line with expectations) after a big pickup in September. The weakness was attributed to the government shutdown, specifically manifest in a collapse of volatile airplane orders (-15.9%). More importantly, core capital goods orders (nondefense, ex-aircraft) were -1.2 vs +0.8% expected.
Most importantly, shipments were -0.2%. Not 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, that Q3 spike in orders has been largely retraced.
The raw materials components included in rallying railtraffic echo the boost in inventories and orders. Yet, without a followthrough in shipments, the system can grow [is growing] awash in excess supply, suggesting that midstream businesses have overestimated aggregate demand.
As interest rates start to cyclically rise, I still expect the reflation to increase investments like Capital Expenditures. Further, the European recovery and Japanese reflation provide a tailwind with growing US export demand. Accordingly, until we get a QE taper, I’d be surprised to see any sustainable pickup in shipments. The thing to watch in the interim is inventory stockpiles and the divergence between orders and shipments. Higher inventories & inventory/sales ratios plus a widening gap between orders & shipments would be an alarming sign of oversupply.
I also still expect strong economic growth in 1h2014. Regardless, I don’t want to see too much slack in these data series, which would suggest that we’re pulling-forward future production.