Main takeaways:
- Weaker than expected report + negative revisions => further negative revisions to growth in Q3.
- Manufacturing shipments and orders of (core) durable goods peaked one year ago.
- But shipments of (core) capital goods have already bottomed -- this hints at improving capex.
- Most of the drop in (core) durable goods is due to primary metals (iron and steel mills) and machinery (farm, mining, oil field and gas field). Machinery shipments and orders appear to have bottomed.
September durable goods repor was weaker than expected and revisions to August were to the downside.
The report paints a weak picture for overall manufacturing but suggests some pickup in corporate capex from Q2.
Total manufacturing shipments of durable goods excluding the volatile groups transportation and defense -- the core durable goods -- have peaked last September and show no sign of improvement in the near term. New orders also do not suggest an improvement.
But when looking at the breakdown, it is clear that most of the decline in manufacturing durable shipments results from the group primary metals, which includes iron and steel mills.
The chart below shows the decline in shipments (in $bn, current prices) in the last one year and in the last six months (annualized). Most of the drop in core durable goods can be traced to the primary metals group. The group machinery is being hit by a drop in farm and mining, oil field and gas field machinery. But this category has shown an improvement in shipments in the last 6 months.
The above chart also shows core capital goods shipments have improved in the last six months. This is a positive sign, since core capital goods is a proxy for corporate investment.
The year-over-year performance of core capital goods shipments points to a weaker annual growth for investment in the Q3 (see chart below).
But the quarterly improvement in core capital goods shipments suggests a pickup in investment compared to the second quarter.
The chart below shows the quarterly association of core capital goods shipment and equipment investment. It suggests a rebound in capex from near zero in Q2 to about 4% in Q3.
The new orders data from the ISM manufacturing report suggest the weakness in durable goods orders might be overdone.
Detailed chart pack
In all the following charts, shipments measure the dollar value of products sold by manufacturing establishments and new orders are intention to buy for immediate or future delivery. Unfilled orders (or order backlog) are the inventory of open orders to be delivered in future periods, and inventories represent the value of end-of-month stock regardless of stage of fabrication.
US Core* Durable Goods (*excluding transportation and defense)
Durable goods orders and shipments peaked one year ago (Sep/14).
Inventories peaked in the first quarter.
Unfilled orders peaked in March and have been sideways since then.
Inventory to sales ratio roughly sideways after a build up in Q4 14 and Q1 15.
US Core Durable Goods (with unfilled orders)
US Core* Capital Goods (* excluding defense and aircraft)
Core capital goods (a proxy for capex) suggest 3Q could be a bit better than 2Q.
