Deceptive Rebound in Durable Goods

Durable goods orders jumped 2% in June, the fastest pace in more than a year. The move follows three months of declines and was aided by a 75% surge in aircraft orders. Boeing was able to secure a new round of orders for its 737 Max at the Paris Air Show, despite an extended grounding after two crashes. The gains followed a drop in May that was even worse than initially reported.

Core capital goods, which strip out volatile aircraft and defense, showed strong gains of 1.9% for the month, the strongest since February. The strength was broad-based and reflects some firming in manufacturing surveys over the last month. Orders for computers and related products were the only category to slip into the red in June.

Core capital shipments, which feed directly into the calculation of business investment for second quarter GDP, rose 0.6% in June. That affirms our view that real GDP will come in slightly above the 2% mark in the second quarter.

Bottom Line
Today’s data do nothing to reassure the Federal Reserve that confidence in the business sector is coming back in a meaningful way. Durable goods orders pleasantly surprised to the upside, but gains were tempered by downward revisions to previous months. The largest revisions were to aircraft orders, which are adding noise to the data because of the 737 Max. [Boeing reported with its latest earnings that it might consider temporarily shutting down production of the plane.] On net, durable goods orders for June indicate business investment is picking up, but remains muted for this late stage in the expansion.Equity markets have been consistently more bullish on the prospects for a ceasefire in the trade war than those on the front lines. Treasury Secretary Steven Mnuchin has expressed optimism about the G20 meetings. We hope he is right; the costs of trade wars are beginning to compound.

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