Durable Goods Orders Fall Off a Cliff

Durable goods orders declined 0.6% in October. The consensus expected orders to have risen 0.5%.

To make matters worse, excluding transportation, orders declined 1.3%.

The market may try to flip the data by stating that it was a purely statistical decline. Orders in September were heavily revised upward as orders rose a full percentage point more (2.0%) than originally expected.

However, if the recovery is going to be sustainable, orders need to increase at a steady pace over the next several months.

Businesses had stated in their earnings reports that increased demand expectations were driving them to purchase new investment equipment. Immediately following the announcement, orders for nondefense capital goods excluding aircraft, a proxy for business investment in equipment and software, surged 2.6% in September.

All of the gains in business investment were wiped out in October as orders for nondefense capital excluding aircraft fell 2.9%.

The drop in business investment orders included an 8.0% decline in machinery orders and a 2.1% decline in computer and electronic products.

Motor vehicles, a sector that many economists had believed would lead the U.S. out of the recovery, continues to falter. After rebounding 1.5% in September, new orders reversed direction and declined 0.1% in October. The drop correlates well with the abrupt stoppage in the industrial production and assemblies data but goes against the strong increase in October sales.

To further complicate matters, total manufacturing shipments declined 0.2% in October after rising 1.6% in September. Shipments of goods are accounted in the GDP report, not the orders data.

Excluding transportation, shipments rose a steady 1.2%.

Most of the increase in shipments was in manufacturing inputs, including primary metals (3.6%) and fabricated metal products (0.5%).

The increase in manufacturing inputs could mean that manufacturers are beginning to stockpile supplies and are readying themselves for an increase in production in the near term.

However, the increase in production may still  be weeks or even months away if durable good orders do not pick up significantly.

Manufacturing inventories held steady with no growth after declining 1.2% in August.

Unfilled orders fell 0.4% for the month.