US Capex weakness?

by: Peter de Bruin

Durable goods orders plummeted in July…

Durable goods orders fell by 7.3% in July, following a 3.9% rise the month before, which was considerably worse than the consensus forecast of a 4% drop. However, the weakness of the report was mostly concentrated in transportation orders, which can be very volatile from month to month. Indeed, excluding transportation, orders fell by 0.6% in July. This was actually the first drop in four months, and as a result, ex transportation orders remained on a positive trend. Ex. transportation orders tend to lead manufacturing production by a couple of months and the data therefore adds to evidence – such as the recent strength seen in the ISM manufacturing index and Markit’s PMI, that we are about to see a pickup in manufacturing production. In turn, this is in line with our view that final domestic demand growth will strengthen in the second half of the year.

…raising fears about a softening investment outlook…

However, there was also a 3.3% drop in capital goods orders, while capital good shipments fell by 1.5% in July, casting some doubts on the strength of the investment outlook. We are not too worried that we will see a sustained softening in investment, though. For a start, the fall in capital goods orders was not unusually large and followed four months of solid gains. Indeed, despite the drop, the 3mo3m growth rate managed to rise to an annualised 12.8%, up from 8.9% the month before. Granted, the trend in capital goods shipments is more negative, but we expect the shipment data to improve soon, as the data catch up to the more positive trend in capital goods orders.

…but the fundamentals for investment remain sound

This is because the fundamentals for investment remain sound. Indeed, the share of profits in GDP is currently hovering at historical highs, suggesting that it is lucrative for companies to invest. Moreover, judging from the latest Senior Loan Officer Surveys, banks have eased credit standards on commercial and industrial loans, suggesting an increased willingness to lend to companies. Perhaps unsurprisingly, in the past, this always tended to coincide with a strong pickup in investment, as credit became more freely available. And we expect this time to be no different. Finally, uncertainty with regards to the economic outlook has receded. The pace of fiscal consolidation should ease significantly in the second half of the year, while the cyclical fundamentals have continued to improve. Granted, we have seen a sharp rise in interest rates as the Fed announced its intentions to start to scale back its asset purchase programmes, which resulted in some softer housing market data, but the majority of economic reports, from initial jobless claims to confidence data, continues to point in the direction of a stronger recovery in the remainder of the year.